The importance of asking the right questions

As a  long time market observer, one of the questions I am most frequently asked is: what do I think the stock market will do next?  This question makes me wince.  Why?  Almost any answer I give is fruitless. I could give a very accurate answer, which is what J.P. Morgan did when he was repeatedly asked the same question many years ago.  He said, “Prices will fluctuate.” I could be a little more specific and say, “On average, if history is any guide, prices will rise 20 out of the next 39 days and fall 19 of those days. The particular sequence is unpredictable and unknowable.” Or I could be ultra-specific and say, “The S&P 500 will rise by 4.2% in the next three months.” But why should anyone believe an answer as precise as that?  Such predictions are no more than guesses, and even if you gathered a bunch of them from every market pundit, you would simply be taking a sample of the consensus, which may or may not turn out to be true. We know that such forecasts are about as accurate as rolling dice, so why even ask?

All straightforward answers are either too nebulous to be of any use or too precise to be believed.  In short, the question is simply a poor question.  If virtually all answers are not helpful, it merely distracts one’s attention from asking and answering much more important questions.  Other questions along this same line are equally poor: what will interest rates do in the next six months?  What will the inflation rate be in two years?  What will be the best performing mutual fund over the next year?  The answers to these questions are unknowable and always will be so.  Dwelling on the unknowable is an unproductive quest that will not bring investors any closer to realizing their financial goals.

The amount of money, time, and effort spent trying to futilely answer these and other similar questions boggles my mind.  Why do investors persist in asking questions for which is would be nice to know the answer, but will always be impossible to answer in any way that is useful?  There have to be better questions that investors should be asking if they truly want to become more proficient.  For example, what is the relationship between the stock market and the economy?  What is the difference between investing and gambling?  Why is selling much more difficult than buying? Why are investors most likely to be selling at market bottoms and buying at market tops, when that is the opposite of what should be done?

These are the types of questions investors should be asking themselves, but aren’t.  The answers to such questions can be far more revealing and have a bigger impact on how investing decisions are made.  A while back, I pondered the answers to these and other more insightful questions, and by incorporating them into my investment decision-making process, it has lead to far better outcomes.  Investors who ignore the answers to such questions are far more likely to make poor decisions at the most critical juncture.

When I searched the financial literature for well-explained answers to the key questions investors should be asking, I came up short.  A few authors covered a few points, but they were typically buried within a bunch of irrelevant or otherwise misleading sections.  So I decided to remedy this situation by researching, explaining, and teaching the answers.  I compiled them into a book, which I called Cognitive Investing: The Key to Making Better Investment Decisions.  More than 30 of the chapter titles are the essential questions that investors should thoroughly understand in order to navigate through the stormy seas of today’s turbulent financial ocean.  Thoroughly understanding the answers to these questions and their implications will profoundly and fundamentally transform the way investment decisions are made and will lead to far better outcomes for those who ask the right questions.

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