Friends who know I’m an investor often ask me what will happen next. In the past 48 hours alone, I’ve been asked versions of these questions:
Is this a pullback to buy, or the beginning of something worse?
Can the bull market keep going if the Fed keeps hiking?
Will higher oil prices and bond yields finally catch up with stocks?
Can AI stocks keep carrying the market?
Should I invest now, or wait until after the midterms?
These are understandable questions. They also contain a trap: the belief that successful investing requires a confident forecast. Fortunately, it does not.
I’ve made millions over the past 30 years of active investing without knowing what the market would do next. What I’ve relied upon is a strategy I created through trial and error helps me make decisions with incomplete information and news-driven anxiety despite that uncertainty.
As investors, our job sounds straightforward, but doing it consistently is difficult: recognize what the market is doing, decide how much risk the evidence justifies, and adjust as conditions change.
The difficulty comes when the evidence clashes with what we want to believe and especially how we are currently positioned.
No one wants to be or look wrong, which has us looking for anything that confirms that we are right in every situation.
We can see that tension in the market right now.
The major indexes look constructive while participation underneath the surface deteriorates. Just more sideways consolidation before the next leg higher, right?
However, a few leading stocks are making new highs while most struggle below important support. That combination calls for selectivity.
Waiting for every uncertainty to disappear is no strategy either. There will always be another unanswered question.
Think of poker. Skilled players cannot know every card that will be dealt. They assess the information available, weigh the odds, size their bets, and reconsider as additional cards appear. Even a well-played hand can lose. Being wrong is part of the game; betting too much can take us out of it.
An active investor does the same thing. We form a working hypothesis, take an appropriately sized position, and define what would tell us we are wrong. Then comes the hard part: respecting that evidence when it arrives.
Price is the final test.
If the market breaks higher, participation expands, and leading stocks follow through, the bullish case earns more weight. If support fails, leadership weakens, and selling spreads, the defensive case strengthens. When the evidence does not justify greater exposure, we do not have to manufacture a reason to act.
The costly mistake is committing heavily to what we think should happen, especially when the price action disagrees.
After all, a compelling economic argument does not require the market to agree with us. Neither does a seasonal pattern, valuation concern, or popular narrative. We can be right about the story and still lose money on the position. Those factors deserve consideration, but they cannot excuse ignoring what prices are actually doing.
Here is a practical way to operate without certainty:
Observe the current evidence.
Define what would confirm our idea and what would invalidate it.
Size our exposure around the evidence and the loss we are prepared to accept.
Add, reduce, or exit as conditions change.
Simple, no?
Not unless you’ve developed and work a strategy that helps you do these things consistently well.
The goal, after all, is to have a strategy that helps us face uncertainty with a measure of confidence in spite of that uncertainty. And just because we do not know what lies ahead does not mean we cannot work to put the probabilities in our favor. Our confidence comes from the strength of our process and our willingness to adapt depending on what the price action says.
So, as we prepare for the week ahead, let’s ask: What is the market confirming now? What evidence is still missing? What would justify increasing or reducing our exposure?
Those are the questions we’ll work through together tomorrow.
Until then, my friends, I hope you are having a fabulous, fall weekend. I know I am!
“The best attitude towards a volatile and ever-changing market is that of a perpetual student.” ― Daniel Rasmussen
An important and fundamental article in my opinion.
I find the analogy to poker very apt. I've always wondered if playing poker could make me a better swing trader and investor. I believe it can, because while you're on a different playing field and the transparency of the variables is less than on the stock market—for example, what hand I've been dealt, how many players are still in the game, what cards are on the flop, who has raised and is showing aggression, etc.—it's still difficult for me to accurately assess all the variables on the stock market, such as interest rates, oil, inflation, and bonds, and what impact these have on stock prices, since it's not necessarily causal (but I've improved significantly thanks to your articles, so thank you for that).
And yet, it's a similar business. You have to be able to assess every situation at the table and practice making increasingly better decisions: Do I want to risk my hard-earned money under these conditions, or not? If the odds are in my favor and I can take a higher risk, or if the odds aren't so good right now, then I'll pull out and watch from the sidelines.
I think people tend to get too caught up in the past and waste too much time worrying about the future, which they can't influence anyway. It would be much more important and sensible to clearly understand the situation here and now, assess the probabilities, and make a decision based on the current situation without trying to look into a crystal ball.
Thank you for this insightful and informative article. I'm looking forward to the next few months and what the future holds.
Lifelong learning is key.