Precision in Science, Uncertainty in Investing

The Precision of Modern Technology

The developments that are occurring in technology are incredible. Intuitive Machines just completed a mission of sending a lunar lander to the moon. They were given a 100-meter radius to land the craft in, ultimately touching down within 1 meter of the desired target.

The final stages of the mission began with a 62-mile orbit above the moon. The craft started its descent with a 19-second burn followed by a 30-minute coast, bringing the module down to 12 miles above the surface. It then had a 9-minute burn, slowing the craft down from 5,577 ft/sec to 131ft/sec. Using vision-based terrain navigation, it touched down going 2.2 mph (or 3.2 ft/sec) on all four legs. Even though this was an unmanned craft, one of its missions was to measure the distance between Earth and the Moon. Using a prism reflector and “reflecting very short laser pulses from Earth-based lunar laser-ranging observatories and measuring transit times to the Moon and back,” they will determine the distance within, not one mile, not 100 yards, one yard, or one inch, but one millimeter. That is about the width of the font you are reading. You may be asking: What does this have to do with the stock market?

Why Can’t We Predict the Stock Market Accurately?

We have all this technology that is achieving incredible results in the physical world, yet we can’t seem to come up with what a stock is worth from one day to the next. We have yet to increase our predictive powers much better than they were 100 years ago. There is no shortage of people trying with immense resources to solve this problem, and even with an incredible amount of money chasing a solution, we seem no closer. Ever wonder why? A few points to consider.

The first is that certain laws of nature exist in the physical world, and outcomes can be achieved with complete accuracy. Everyone observes the same laws. They are as simple as 1 + 1 = 2, gravity doesn’t change, and if your money earns 7.2% per year, it will always double in ten years. Always. Lunar eclipses can be predicted to the exact day centuries from now. Yet analysts who all have the same numbers, company financial results, sales data, and economic figures—even the Federal Reserve with hundreds of PhDs on staff—still can’t predict what is going to happen tomorrow. The answer is simple; we are all looking at the same information, but depending on whether we are in a state of fear or greed, we play to win versus just trying not to lose, or have one political belief over another, these factors result in lines of thinking that appear to have different conclusions daily and even by the minute. Human psychology is predictable, but not in the short term. Your own interpretation may change from day to day depending on what influences you. Tomorrow your interpretation may change depending on what new information you stumble upon, or you suddenly see something that was always there. The increasing problem is that the information we think is true may turn out to be false. This all becomes impossible to predict; however, there is good news regarding what looks like chaos and uncertainty.

Innovation and Economic Growth: A Financial Law

Ultimately, the economy grows regardless of world wars, political uncertainty, pandemics, or investor fear and greed. Why, you ask? We all want to live a normal life, and because $1 of earnings is still $1. The only thing that changes is how we perceive that $1, which drives what investors are willing to pay on any given day for a company. This is why great investors love it when you decide the world is coming to an end and they buy your $1 for $0.50. Sooner or later, $1 is always worth $1, and stock prices reflect that. We recognize it is easy to become distracted, which is why we decided to place more emphasis on dividends. It allows us (me) to focus more on the cash instead of what is going on in the background noise. It anchors our strategy to the $1, as opposed to the perception of how current scenarios may affect our future $1. Over time, that dollar compounds, and if it grows by 7.2% per year, it will double in ten years—a financial law. The beautiful thing is that no matter which political party is in charge, what economists think each headline number may mean, or what analysts think Nvidia will earn next week, the modern American economy is a “law of nature” that has worked for over 100 years. We seem to have no lack of innovation, even when it is measured in millimeters.

Observations on the Market No. 405