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Predictions and Psychology

This article is a follow-up to my prior three articles in which I gave my best guesses about the future of the financial markets. I wanted to make a few observations about making prognostications. Many time prognosticators look to the past for patterns which will repeat themselves in the future.

I myself look to history quite often, searching for parallels to what is happening today. However, I always keep in mind that famous quote by Mark Twain - "History doesn't repeat itself, at best it sometimes rhymes".

For instance, Wall Street is expecting a replay of the 1930s - hard times with deflation. I totally disagree - I think we will "rhyme". The actions of the Federal Reserve are completely different now as compared to the 1930s. We may have some hard times, but instead of deflation I strongly believe we will have high inflation.

PSYCHOLOGY and PREDICTIONS

I now want to talk about the main point of my article. Although people endlessly ask for prognostications, they rarely want to hear the answers. When people ask "What is going to happen?", what they are seeking is reassurance and reaffirmation of their own views.

Since people feel most comfortable in a crowd, their view will most likely be the current prevailing consensus view. This is especially true on Wall Street where people are afraid to stand out from the crowd for fear of losing their cushy jobs.

People do not want to hear contrarian thoughts. People simply want to be told that they are correct and they want to be congratulated on their "wisdom". Contrarians are scoffed at and ignored because, after all, they are "nuts".

Even when proven right, they are disliked as being the bearer of bad news. Yet, who has been proven correct about our current economic mess? Not the consensus mainstream economic view, but the contrarians.

What about the other end of the spectrum from the contrarians? What about the people who constantly spout drivel and nonsense, such as the pundits seen on CNBC air each and every day?

When confronted with the facts that they have been proven wrong, the pundits take several tacts. They either say that they "don't recall" ever making such stupid statements or they claim that they actually "knew" that some event would happen all along.

My favorite though is seeing these pundits claim that they were victims of events that "no one" could have predicted. What nonsense! This is the classic Curly defense from the Three Stooges - "Sorry,Moe! I'm a victim of circumstances"!

Nyuk! Nyuk! Nyuk! Unfortunately, anyone who listened to these pundits and followed their advice is not laughing.

My best advice as far as advice and predictions is as follows. Take the consensus view with a large grain of salt and try to listen to contrarian views not matter how wacky they may sound.

I would also tend to listen more to people who have been successful investors for a number of years. A good is example is famed contrarian investor Jim Rogers, who has written several books. And always ignore the "academics" such as economists - these people have no practical real world experience in the financial markets.

As always, please feel free to contact me directly or through the forum.

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