One Prediction and an Exit?

"You never bet on the end of the world, 'cause that only happens once and something that happens once in infinity is a long shot,." — Art Cashin

​​The Portfolio Performance

The portfolio is UP +22.77% YTD

The S&P 500 is UP +27.37% YTD

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I haven’t written in a long time, as you all might expect, I’ve been a little busy lately at my job at Crystal Waters Capital.  I also haven’t looked at the portfolio in a long time and I’m sure I’ll need to make some changes for the new year. While the portfolio is trailing the S&P500 by a few points, our +22.77% return is better than most people achieve in an index fund, mainly because they can't stick with the index fund. A look at the long term volatility of an S&P 500 index fund explains why.

How vital is it to stay invested? Miss just 5 of the best days and your returns get cut nearly in half over your lifetime of investing. The impact of investors personal behavior can be devistating. I think this is why so many individuals, endowment funds and investment professionals have added alternative investments to their portfolios as a way to diversify and to lock themselves out from making knee jerk decisions.

Source: Fidelity Investments

Time to Quit?

I’m considering ending this blog at the end of this year.  Writing the posts and maintaining the portfolio requires a great deal of time and the website also has a financial cost.  I’ll entertain any feedback from my subscribers about what the future of this project should be.  I know mom would be upset if I quit, but I think the original purpose of the blog has been achieved.

S&P 500 Predictions

It’s December and that means it’s S&P 500 prediction season. 

For the holiday’s, Wall Street trots out their predictions from the best and brightest analysts, economists and market strategists.  The financial news call these ‘estimates’ or ‘projections’.  I say these are predictions with the same value as a tarot card reading. 

The numbers doled out by analysts at all the major financial institutions may be directionally correct but are just as likely to be directionally wrong.  The wrong part is rarely included in the headlines, but a few honest analysts will include a range of values, usually somewhere deep in the letter.  Do these Wall Street firms really need to go to such lengths to produce a year-end prediction?  I don’t think so. 

As I write this the S&P 500 is at 6,094 and the long term average gains each year are approximately 10%.

Predictions from the best and brightest for 2025. 

Ed Yardeni - Yardeni & Associates: 7,000

Deutsche Bank: 7,000

Bank of Montreal: 6,700

UBS: 6,600

Evercore ISI: 6,600

RBC: 6,600

Wells Fargo: 6,500 – 6,700

CFRA: 6,585

Goldman Sachs: 6,500

Morgan Stanley: 6,500

JP Morgan: 6,500

Clay's Prediction

For fun I decided to do a little experiment and publish my own prediction.  For context, Wall Street’s numbers are arrived at after exhaustive analysis of economic conditions, corporate earnings estimates, job data, recession probabilities, the Fed’s stance on interest rates, the political environment, and dozens of other data points.  Just imagine what all that costs.  Well…I don’t have access to a lot of their data, and frankly I don’t have the time to plow through it all. 

Instead, I turned to my free Google spreadsheet and built a Monte Carlo Simulator for the S&P500.  A Monte Carlo simulation is a model used to predict the probability of a variety of outcomes when the potential for random variables is present.  Monte Carlo simulations have a vast array of applications in fields that are plagued by random variables, notably business and investing.  Telecoms use them to assess network performance in various scenarios, which helps them to optimize their networks. Insurers use them to measure the risks they may be taking on and to price their policies accordingly.  Your financial planner can use a Monte Carlo simulation to predict the likelihood that you will run out of money in retirement.  A Monte Carlo simulation takes the variable that has uncertainty and assigns it a random value. The model is then run, and a result is provided. This process is repeated again and again while assigning many different values to the variable in question. Once the simulation is complete, the results are averaged to arrive at an estimate.

In my calculations there is zero economic input, no market data, no conjectures about political influence, in short, none of the information used by Wall Street.  In my simulator I run 1,000 simulations every time the S&P 500 changes value. 

My spreadsheet uses a nominal market return of 0.10, and a standard deviation of 0.10.  Both of those values can be changed to play ‘what-if’ games with the result.  From the 1,000 simulations I extract the minimum, maximum and mean values to arrive at my base case, best case upside, and worst case downside.  I then average the base case against the worst case and best case scenarios to arrive at the mid-range values.  I then attribute probability percentages to each value.

In the chart below I arrived at a base case scenario of the S&P 500 reaching 6,711 by year end 2025.  I give a 5% probability of a 15.53% decline to 5,131 and a 5% chance of a 39.95% rally that reaches 8,502.  In between I give a 20% chance of a 2.53% decline and a 25.21% advance.  Note that my base case scenario finds the long term average return.

The other way to read this is to delete all the numbers and tell yourself the story. 

Once upon a time, in a land far, far away from Wall Street,

a humble portfolio manager made a prediction.

Without a magic wand or the fairy dust that the wizards used

Our humble portfolio manager boldly stated

“There is a 50% chance the stock market will rise,

There is a 25% chance it will decline,

and a 25% chance it will rise a lot”.

The Portfolio

I’ll take a look and write about any planned changes soon.  Please include any feedback in the comments area of this post as the engagement with other subscribers should benefit all.

"Markets don't go to zero; portfolios do.

Buy quality, be patient...and look twice for motorcycles."

- Clay Baker

Stay Invested,

Clay Baker

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Clay's Rules

Rule #1: Don't lose money

Rule #2: See Rule #1

Rule #3: Portfolios go to zero, markets don't; Stay Invested

Rule #4: When good stocks you own drop 10% below your cost basis, add shares

Rule #5: Bull markets aren't sustained without the Transports

Rule #6: When Forward P/E is lower than TTM P/E, expect earnings to increase

Rule #7: When an investment bank sells below book value, buy it

Rule #8: Tips are for waiters. Do your own homework.

Rule #9: Don't sell a stock because you're bored with it. Do your homework.

RULE #10: Don't expect a company's stock to perform according to your timeline; be patient.

Rule #11: Investing is easy. Waiting is hard; waiting is the hardest part.

Rule #12: It's hard to be incredibly intelligent. Not being stupid is pretty easy.

Disclosure: I am personally invested long in some or all of these stocks or funds that appear in the Stay Invested portfolio and may purchase or sell shares within the next 72 hours. I am also invested in other stocks and funds that do not appear in the Stay Invested portfolio but may be mentioned or related to this article. It is not my intention to advise or encourage the purchase or sale of any security. I am invested long in these securities mentioned in this post:

None mentioned

I am invested short in these securities mentioned in this post:

None mentioned

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. This article is not intended to offer investing advice, guarantee 100% accurate predictions, or be interpreted as providing a personal recommendation. This and all articles on this website are provided for entertainment purposes only. Investing involves risk and risk of loss of part or all of your capital. Invest wisely, make your own decisions, seek advice from multiple sources.