Being Right Isn't Enough to Make Money in the Markets

It didn't take long for Ned Davis to prove he belonged in the world of finance...

His early steps were unconventional. Ned was a Harvard Business School dropout. He thought the program focused too much on management... while he was more interested in business and economics.

Despite that, he got his start in 1968 with investment bank J.C. Bradford & Co. And he quickly rose to fame.

Ned had a knack for predicting market moves. His forecasts were spot-on throughout the 1970s. The famous financial TV show Wall Street Week with Louis Rukeyser praised his accuracy in a 1978 broadcast...

"Ned Davis has had an outstanding record in recent years... and has been absolutely right about most of the major ups and downs," Louis told his followers.

In short, Ned did what most Wall Street analysts dream of. He burst onto the scene and immediately made a name for himself.

But there was a catch...

Being right about the market for 10 years didn't make Ned rich.

Today, I'll share what turned it around for Ned... and most important, how you can avoid his mistake.

Ned Davis should have gotten rich in the 1970s. After all, if you have a guy who's accurately predicting the market, he should be raking in the cash, right?

Well, not exactly. Ned wrote about this in his classic book Being Right or Making Money...

The only problem was that at the end of each year, I would total up my capital gains, and, unfortunately, I would not owe Uncle Sam much money. Before someone else could question me, I said to myself, "If you are so smart, why aren't you rich?"

Ned spent most of the 1970s chasing the idea of making the perfect forecast. But around 1978, he realized he had to change his approach to succeed.

That was the pivotal point in Ned's career. He started to focus on the legends who were growing their investment accounts... not just ones who were right.

He began his homework on giants like Warren Buffett, Paul Tudor Jones, Jim Rogers, and Marty Schwartz – four of the best investors and traders in Wall Street history.

Ned found that they all had different strategies in the market... and different ways they could forecast future results. Buffett was a value guy. Schwartz was a market technician. Yet, both were getting rich.

You get the idea. There's no one-size-fits-all investment strategy.

The secret sauce wasn't in their ability to make the right prediction... or even to pick the right "investment philosophy." Instead, they used tools to decide what moves to make.

These were objective indicators... clear guidelines that showed them when to be in a trade – and when to get out.

Being right and making money are two very different things. You can be right about the direction of a trade, but you can still lose money if you don't have a strategy. And if you follow a system – one based on indicators and good discipline – you can make money in the long term, even when the market doesn't do what you expect.

In other words, what you think isn't as important as what you do... and when you do it.

Ned's deep dive into the best traders in the world changed his career. He scrapped the forecasting... And he founded a research firm based on the principles he learned.

Like the greats, his goal was to use objective indicators to guide his investing. He focused on using timing models to make money. And his firm, Ned Davis Research, has kept doing this since 1980.

Ned's story is especially important in markets like we're living through right now. When times are tough, the yearning to be right grows...

We all want to be right about what happens with inflation from here... or the potential for a recession... or when the bear market finally ends.

We're investors, though. Our goal is simple... to make money. Focusing on being right is a distraction.

Instead, you want to have an investment plan. And you need to stick with it over the long term. That'll help keep you safe in unstable times... And it'll help you thrive when opportunities arise.

You might not be right about everything along the way. But it won't matter – because you'll be making money.

Good investing,

Chris Igou

Further Reading

"Having a system isn't about winning every time," Mike Barrett writes. To the amateur investor, playing the stock market may feel like gambling. But it doesn't have to be that way. If you build an investment plan and train yourself to stick with it, you can earn solid returns while limiting your losses... Learn more here.

It's easy to fixate on the wrong things in the markets. Another common mistake is looking at price moves to figure out when an asset "looks cheap." Make sure your buying decisions are based on what really matters... Read more here.