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Return Predictions Are Implicit in All Investing Advice

Valuation-Informed Indexing #259

There's one good thing about having your views challenged frequently (as mine are by my Buy-and-Hold friends). Smart criticism forces you to think harder. Thinking harder helps you to learn.

I wrote a column here a few weeks ago arguing that, since it is entirely possible today to make reasonably accurate predictions of long-term stock returns by using the mountain of research showing that the valuation level that applies today tells us much about where stock prices will be ten years from now, we all should be doing that. A Buy-and-Holder argued in the comments section that we cannot be entirely precise even with long-term predictions. I agreed with that point. But then I found a point that I don't believe I have ever advanced before forming in my brain and showing up on the computer screen before me.

I compared what investing analysts do with that doctors do. A doctor cannot give precise predictions of how long it will take for a disease to kill his or her patient. Yet doctors still make such predictions. They say: "You have six months to live unless you undergo this operation." Why? Don't they worry that it is possible that the patient will live only five months or perhaps will not die until seven months have passed? That's what Buy-and-Holders do. They argue that since it is not possible to make precise predictions, we should not make any at all.

Doctors appreciate that the goal is to help the patient and that you can't do a good job of that without...