Laws of Investing

Jan 20

Investors cannot exactly forecast.

They are not engineers or even physicists. As a stock price bubble inflates, they know that prices will eventually crash, and at the bottom of a crash, that prices will eventually recover, another reliable rule/principle/law, but they do not know by how much or when.

I also discussed this in 100 Economic Laws:

In relying on economic [or investment] laws, we should understand that they are probabilistic in nature.

The physical sciences have gained their present prestige in part because they can be used to predict the future. Even this achievement must be qualified. If we drop a piece of paper from a tall building, the law of gravity will ensure that it eventually hits the ground, but we will not know where or when. Science cannot reliably predict constantly changing conditions such as wind and weather.

Although the term is often [employed] by economists, there is no such thing as a social or economic equilibrium. None of our decisions as human beings are fixed, all are to some degree forever in flux. And there are billions of us, all interacting to some degree with each other, and nothing about our relations is truly fixed either. In economics, there are few certainties, mostly probabilities, and even the probabilities do not lend themselves to standard mathematical treatment.

If we are a baker, we may think we know what wheat costs, but the mere possibility of some new drought or some new aversion to eating gluten may change the price overnight. Just as in the physical sciences, but perhaps even more so, the probabilities will tend to be vague about the timing of how events may unfold. No matter how certain we are that actions taken in violation of economic law will come to no good end, the timing will remain uncertain, and the same is true for actions taken with better odds for success, however we have defined success.

Life requires a great deal of persistence and patience, and so does economics and investing. But if we are patient, and if we want to improve our conditions, economic [and investment] law shows us the way forward out of poverty and into wealth. Given sufficient time, the wealth creation can be staggering.