The Weekend Edition is pulled from the daily Stansberry Digest.
I am no expert in volcanic activity...
But sometimes you just have a feeling about things.
That's why, in early 2017, when my colleagues Porter Stansberry, Steve Sjuggerud, and I gathered for our annual Portfolio Solutions event, I made a bold move...
We were each asked to share our biggest predictions.
Porter suggested it'd be a good year for small-cap value stocks... Steve predicted Japanese stocks would do well... And I predicted that Mount Stromboli, on an island off the northern coast of Sicily, would have a major eruption.
Those who heard my prediction gave a little chuckle, possibly because they didn't think I knew anything about volcanoes... Or maybe they knew that Stromboli, though constantly active, hadn't had a major eruption since 1921.
Or maybe they laughed because they were expecting a stock market prediction instead of a geological one...
And it turns out, I was wrong ‒ or rather, I was early. Two years later, in 2019, a series of paroxysms ‒ as these types of eruptions are called ‒ happened at the volcano's peak. The blast could be heard 17 miles away.
So... why did I predict a volcanic eruption halfway around the world on a remote island to readers of an investment advisory?
First, I'll go one question further and ask, what's the point of predictions at all?
We live in a complex world. I don't mean that in a philosophical sense, but in a mathematical one.
Complex systems involve many moving parts that have intricate feedback mechanisms. More specifically, a small change in inputs can lead to huge changes in outcomes...
The study of complexity theory began when weather modelers noticed that just a subtle difference of a setting in their models led to major changes...
For instance, starting a model at a slightly warmer baseline didn't point to a slightly warmer weather forecast. Rather, the changes were much more significant – and went off in unexpected directions.
It's the same with our economic system. Little changes can lead to widely divergent outcomes for the market... And you simply can't predict them. It's fundamentally impossible.
The unpredictability of the world often gets reduced to the cliché of "a butterfly flapping its wings"...
But there are a few things you can take away from this.
I, for one, derive a sort of stoic calm from thinking about the randomness of the universe. This feeling crops up in sayings like, "part of God's plan" or "it is what it is."
On a more practical level, it forces humility in what you are able to control, and helps you focus on the level at which you can operate.
So if the butterfly in Beijing causes a hurricane in the Atlantic, what are you supposed to study: butterflies, historical weather patterns, or satellite data?
You could go with any of these. Personally, though, I'd say you just build a hurricane-proof house.
I knew the audience wanted a financial prediction...
But I like to needle people. And I did provide a financial prediction for our Portfolio Solutions viewers... but in an unconventional way.
My point was that your investments aren't much different than a volcano. You don't know what will happen, or when something will happen.
Your portfolio might explode... Or it might thrive. You can do all the work in the world to predict the future, but you'll never get it perfect.
Scientists have worked for decades to get better at predicting volcano eruptions. And they've gotten a little better...
But the ultimate answer has always been to stay away from the edge of the crater. I went to the edge of a volcano a few decades ago. It's a scary place. And I've never been back... So there's that.
Then there's the fact that tech shares have tumbled...
Analyze your portfolio's performance over the last three years. Your success essentially depends on where you fell on a single prediction... That is, how overweight you decided to be in big-tech stocks.
The Nasdaq Composite Index is down 14% since its most recent high in November...
The S&P 500 Index has also cratered, but not nearly as much.
If you bought heavily into what are commonly known as "FAANG" stocks ‒ Facebook (FB), now Meta Platforms, Apple (AAPL), Amazon (AMZN), Netflix (NFLX), and Google (GOOGL), now Alphabet ‒ you trounced the market in the last year or so. And you're now paying the price.
These companies make up such a large portion of the S&P 500 that without them, the oversized returns over the last few years start to look about average... And the recent pullback may be more than you think you can handle.
From the huge post-pandemic rally to the sharp fall in recent weeks, you've likely seen the oscillations in your portfolio... And what shape they took rested solely on your call on this prediction.
Here's the kicker: You may not have even known that was a prediction you needed to make... or that it was a prediction that you even made in the first place.
We don't like to invest that way. When we make Portfolio Solutions recommendations, we don't want to rely on one big call or a guess about whether the market has bottomed or not. We like to intentionally build a portfolio of rock-solid businesses...
Investing in a complex world requires a complex answer...
Now, complex doesn't necessarily mean difficult. It just means there are a lot of moving parts...
Let's say you need 20 stocks to build a portfolio. You can't just make 20 predictions on what stocks will go up and buy them... Predictions are worthless.
Rather, you need to map the connections between them. You may think, "If this stock rises because tech stocks shoot up, then this industrial stock may decline."
And while it sounds like you want some sort of magic portfolio in which they all go up, it's not going to happen.
You want the stock that will decline, so long as your other positions are still moving up.
Here's an example... On a financial level, gold mines are a tough business. They have an asset in the ground that costs a lot of money to unearth, and then they run down the availability of that asset over time.
You can expect a gold-mining stock to be an investment that is likely to generate a negative return. But you can still hold it in a portfolio, knowing it can soar when the rest of your portfolio falls.
It's the same thing with negative-yielding bonds or certain value stocks. Your prediction can be that they will fall... but you still buy them.
Back to your hypothetical 20-stock portfolio, you've got to break this all down. You have 20 stocks with 19 relations to each of the others, and you have 190 relationships to sort through...
How do you manage that? The answer is, you do it with a little bit of spreadsheet building, a little bit of portfolio math... and a wealth of experience.
If you watch the market every day for a decade or so, you can get a sense for when something isn't behaving correctly, and you can adjust your holdings accordingly.
Keeping track of all that sounds impossible, but it's not... You can earn returns without making risky predictions.
Stock-picking is difficult...
Putting those stocks together into a coherent and robust portfolio is even harder. It takes years of experience to get a feel for how markets can move.
Few everyday investors ever get the reps in to hold all those moving parts in their head.
And while many readers enjoy receiving our stock ideas and incorporating them into their overall plans, we hear from many others who want a fuller design that shows how it all works together.
You will get predictions wrong... There's no doubt about that. But you will get others right. When you put them together – carefully and strategically – the correct predictions cover the rest and push your net worth higher.
We know that you don't want a prediction about a volcano... You want to know what to do about it, how it will play a role in your life, and what other risks may be around the corner.
To close this essay out, let's bring the discussion back to the present moment...
Should you own technology shares now? They have fallen and may fall more. But on the other hand, they are cheaper than they were last quarter, and a handful of them are stellar businesses.
So the frustrating answer is... it depends. Own the right technology businesses in the right amounts – and in the right relation to your other investments – and you can win either way.
That's the potential of a well-constructed portfolio. It isn't easy, but it's extremely satisfying to sleep at night knowing that you fully understand your risks and feel confident in your ability to grow your wealth each year no matter what the market is doing.
This is the exact feeling we have been delivering to subscribers of Portfolio Solutions for five years now. With 2022 underway and with a plethora of unknowns on the horizon, I urge you to check it out if you haven't already.
2022 is going to be a year of volatility. And in a world full of unknowns, it pays to know your portfolio is protecting your hard-earned capital from whatever's next.
Good investing,
Dr. David Eifrig
Editor's note: Last week, three of Stansberry Research's top editors went on air to tackle one of the top questions on investors' minds: "What's next, America?" Their answer was much bigger than a prediction... Steve, Doc, and Director of Research Matt Weinschenk discussed how a "bombproof" portfolio can help you capitalize on whatever happens next. We urge you to prepare now, before "Mr. Market" makes his next move... Get all the details while it's still available right here.
