Around this time> of year, nearly every newsletter, investment bank and financial columnist puts forth their predictions for the new year. Many will offer up a top 10 list highlighting their favorite sectors or stocks.
Yet, although it might seem like a cop-out, I'm the first to admit that I haven't the faintest idea what 2011 will bring. Prognostication may be the essence of what we do as speculators, but I'm humble enough to know that even the best forecasts are gussied-up guesses at best.
For example, as the summer wound down, September was handicapped to be the worst month of the year, yet stocks surged nearly 8%, the best showing for the month since 1939. And now with the market kissing two-year highs, more than half of investors surveyed are bullish.
Not that those predictions seemed so far off at time. It might be hard to remember, but it was only this past July when the S&P 500 was down nearly 10%. It has since rallied back nearly 20%.
That's the problem with New Year's forecasts. Investing isn't like burying a time capsule. You shouldn't entomb your investments on Jan. 1, dig them up a year later to see if anything worked out. Rather than looking into next year, start by looking only at today. Take your cues not from the calendar, but from the most influential indicators we have: market prices of the securities themselves.
2011 will bring change, but it won't all erupt in one day's time. With confusion in Washington and an endless number of breaking news alerts, markets can often seem chaotic. They're not. Like the seasons, they tend to move in trends that persist over time.
It Was a Very Good Year
Netflix 1 year
Consider that it took the better part of 2010 for Netflix (NFLX)
I liken the process to opening the window to get a read on the weather. Today, for instance, it was about 20 degrees in Chicago. And while I don't have a guarantee of what tomorrow's temperature will be, until I see evidence to the contrary, I'd take odds that it's not going to be 85 degrees and balmy.
So forget the calendar and the fearless forecasts. The assumption one should start with is that the present inertia of the market's trends will continue. Right now, that means stocks and risk asset move higher while bonds move lower (and interest rates higher). I give myself permission to revise that forecast, but I must respect the market as it is today.
Every day I look at the markets and my positions and try and get a sense of just what's going on. Because we tend to pay closer attention to the investments actually held within our accounts, the most telling info often comes from our own profit and loss statements.
So on Jan. 1 just as you should ideally do every other day or week ask yourself what is working and what is not. Unless a position has grown to dominate your portfolio, there's no reason to dump profitable, open trades just because a shiny ball drops in Times Square.
The only positions I advocate eliminating are the "meaningless" ones, small trades below 1% of your capital that won't noticeably impact your bottom line, even if they rise substantially. It is a good practice to consider year-round, but it's made even more apparent as we tally resolutions for the year ahead.
So forgive me for not venturing a prediction for 2011. I have no idea what will happen and neither do you. The events that usually impact our lives most are those for which we can never fully prepare. But I'm confident that it's these decidedly unflashy nuances investment techniques like position size, diversification, stop-loss orders and risk control which can allow investors to profit no matter how poor their forecasts might be.
Jonathan Hoenig is managing member at Capitalistpig Hedge Fund LLC