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When Experts Say This, Don't Believe Them.
Published about 1 month ago • 4 min read
What if everything you thought you knew about predicting stock prices was wrong?
I just finished re-reading A Random Walk Down Wall Street by Burton Malkiel, and it reminded me of something important: the future is unknown, unknowable and nobody knows what's going to happen.
Not you. Not me. Not the smartest analyst on Wall Street. Not even the most advanced AI.
Yet every day, we see people and websites throwing around "intrinsic value" calculations like they're scientific facts. But those numbers are just educated guesses.
Imagine it's 2001, and you're doing a discounted cash flow analysis on Blockbuster Video. The company has 9,000 stores, makes $800 million annually just from late fees, and dominates home entertainment. Your DCF model shows strong growth for the next decade.
What your model couldn't predict? A little DVD-by-mail company called Netflix (which Blockbuster actually had a chance to buy for $50 million and famously laughed off). Or that this same company would completely change how we watch movies with something called "streaming."
By 2010, Blockbuster was bankrupt.
However, here's the flip side: In 1997, Apple was 90 days from bankruptcy. Fortune magazine said the company would "likely disappear." If you did an intrinsic value calculation then, it would have been pretty grim.
Fast forward to today - Apple is one of the most valuable companies in the world.
When I see intrinsic value calculations - whether from humans or computers - I remember that the most important thing in investing is what happens tomorrow. And tomorrow is unknowable.
Think about all the things that can change a company's future:
A key executive leaves unexpectedly
A new technology disrupts their entire industry
Government regulations change the rules
A supply chain gets disrupted halfway around the world
A competitor launches something nobody saw coming
Everything is connected. Everything is always changing. Companies either adapt or die. And, even when they do adapt, it still isn't guaranteed to work out.
This is exactly why Warren Buffett tells most people to buy low-cost, broad-based index funds like VOO or VTI.
When you buy the whole market, you're not trying to predict which companies will win or lose. You're betting that humans will keep innovating, businesses will keep growing, and the economy will keep moving forward over time.
Some companies will fail spectacularly (Blockbuster). Others will surprise everyone (Apple). But the overall market captures all of that - the failures and the successes. And, with a market cap weighted fund, the best of the best will rise to the top and you'll own more of the winners and less of the losers.
I'm working to keep it simple: 85% of my money goes into broad-based index funds, and 15% goes into individual dividend growth companies that I think have a good chance of still being around and making more money in 5-10 years.
I'm not trying to calculate precise intrinsic values. I'm just asking: "Will this company probably still exist and be profitable years from now?"
That's about as precise as I can get with the future - and honestly, it's about as precise as anyone can get.
Remember: Every "intrinsic value" calculation is just a guess about an unknowable future. Even the most educated guess is still just that - a guess.
But here's what we're almost 100% certain of: the economy will keep growing, innovating, expanding, and becoming more profitable over time. That's the one bet that's worked for centuries - and it's exactly what you're buying when you own the whole market.
I'd love to know what you thought of this! I'll respond to every reply!
Disclaimer: This is not investment advice, just one person's opinion that may be incorrect. Do your own research before making any investment decisions.
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