(PUB) Investing 2016

“We’ve long felt that the only value of stock forecasters is to make fortune tellers look good. Even now, Charlie and I continue to believe that short- term market forecasts are poison and should be kept locked up in a safe place, away from children and also from grown-ups who behave in the market like children.” THE NEXT PRESIDENT, whether it’s Clinton or Trump, will preside over a bear market. That’s an expectation, not a prediction. Dictionary.com defines an expecta- tion as the act or state of looking for- ward. To make a prediction is to declare or tell in advance; prophesy; foretell. For investors, there’s a subtle but important distinction between expec- tations and predictions. Expectations shape an investor’s mindset, establish- ing a baseline or range of outcomes for what might reasonably happen in the future. Predictions are usually specific, time-constrained forecasts that are gen- erally issued with the understanding that they will be acted upon, but whose outcome may not be known until long after you could reasonably do anything about it. Predictions or Expectations Consider my opening statement— the next president will preside over a bear market. Why is that an expectation and not a prediction? We would all agree that this is within the realm of the possible, particularly given the fact that the current bull market is already in its eighth year. It is an investment scenario we should expect, or at least consider. But I have not been specific as to the catalyst for the next bear market, nor the severity or length of the downturn. I haven’t even been all that specific about the timing—saying something will hap- pen sometime in the next four years isn’t all that helpful when it comes to trying to trade around it. BEHAVIOR Proper Expectations —Warren Buffett

A Normal Bull Market

CouldWeHave a Record Long Expansion?

100% 150% 200% 250% 300% 350% 400% 450%

1933-1937 1938-1945 1945-1948 1949-1953 1954-1957 1958-1960 1961-1969 1970-1973 1975-1980 1980-1981 1982-1990 1991-2001 2001-2007 2009-today

Length of bull market if no bear market in next presidential term ▼

Current Bull Market ▼

If no recession in next presidential term. ▼

Dow Price Return During Bull Market Length of Bull Market (Months) 0 20 40 60 80 100 120 140 160 0% 50%

0 20 40 60 80 100 120 140 160 Length of Economic Expansion (Months)

time the markets. So without making predictions, what expectations should we have for the stock and bond markets and economy going into the end of 2016 and beyond? First, and maybe most importantly, expect stocks to be the best way to grow your wealth and protect against inflation over the long run. Consider the last few decades: Since Total Bond Market ’s inception nearly 30 years ago, the bond index fund has returned 498.7%, well ahead of Prime Money Market ’s gain of 182.8% and inflation, up 117.5%. However, despite some massive bear markets over the period, you’d still have been much better off capturing stocks’ returns over those years. 500 Index ’s 1554.3% gain tells that tale. Second, expect that owning stocks will not be easy, whether you’re look- ing to the end of the next month, year or decade—they will not advance in a smooth line. Since 1900, the Dow Jones Industrials Average has expe- rienced a bear market—a decline of 20% or greater—once every five years, on average. Like the stock market, our economy doesn’t advance in a smooth line, either, and we’ve averaged a reces- sion every six years since the end of World War II. Of course, those are just averages—neither stock markets nor the economy are so accommodating as to follow the calendar.

Not to belabor the point, but if you are still unclear on the difference between expectations and predictions, run a Google search on each word. All of the top search hits for “expectation” are websites offering various defini- tions of the word, while many of the tops sites under “prediction” are related to betting on sports events. That seem- ingly symbiotic relationship with gam- bling should tell you something about predictions. Silly Season With the Presidential election loom- ing, gold at a recent high, stocks becom- ing more volatile and, yes, the end of the year upon us, the pundits and their predictions are revving up. Making wild predictions, whether it’s about politics, the weather or the investment markets, will get you clicks or three minutes of fame on TV, but it rarely provides meaningful or useful advice. So beware. On the other hand, setting expecta- tions isn’t as flashy as making bold pre- dictions, but approaching the markets and building your portfolio based on reasonable and rational expectations is an often-overlooked key to investment success. In short, expectations are about pre- paring for different outcomes, while a prediction is an attempt at guessing the outcome, which often leads investors to

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