Like King Arthur questing after the Holy Grail, many investors pursue something they'll never possess. The former sought a religious relic, while the latter search for a formula that guarantees success in the stock market.
The longer I invest, the more I see those around me scrambling for a quantifiable edge or mathematical advantage over others. Stock market indicators, moving averages, valuation metrics, trading volumes, and short-selling interest are all taken into consideration to find the perfect time to buy stocks poised to skyrocket higher.
I'm not necessarily knocking these approaches -- trying to discover the secret to success seems like basic human nature. But looking for a blueprint in the wrong places could lead to failure and disillusionment, which causes people to give up entirely.
However, there is a proven blueprint for investing success. It's just far more simple than most are willing to admit, as I'll explain.
Up or down in 2024? No one knows
The late Charlie Munger said in 2002, "We have the same problem as everyone else: It's very hard to predict the future." But is it really so hard if you have the right information? For example, two very reliable stock market indicators are both pointing toward a crash in 2024.
First, there's been a decrease in the M2 money supply. This metric tracks the amount of U.S. money in circulation. In the last two years, it's down almost 5%. That's the biggest drop in the lifetime of most people reading this, as the chart below shows. And it's the biggest drop since the Great Depression.
Data by YCharts.
Basically, the last time this happened, the U.S. had one of its greatest economic recessions of all time. That's scary.
There's another reliable indicator: the Leading Economic Index (LEI) from the Conference Board. This index compiles various economic indicators (such as unemployment and building permits) to predict economic cycles. It correctly predicted the last three recessions, and it's predicting another imminent recession right now. If anything, a recession is overdue.
Both the money supply and the LEI paint a bearish picture in 2024. If investors are looking for a magic formula, this looks like a slam-dunk, contradicting Munger's perspective.
However, there's a big problem: Two other reliable indicators predict a boom year for stocks in 2024, not a crash.
First, the U.S. presidential election is less than one year away. Going back 24 election years, the S&P 500 climbed more than 11% higher each time, on average, which is better than its average annual return otherwise. Moreover, only four of these election years saw the stock market go down, according to data from Morningstar. Therefore, this suggests a more than 80% chance for stock market gains in 2024.
Second, the Federal Reserve is likely to cut interest rates in 2024, and this can also lead to stock market surges. Some analysts believe rates will get cut six times in 2024. But regardless of how many cuts there are, any cut would likely boost stock prices, considering that's what's happened nine times in a row now.
And that's the conundrum for investors searching for the perfect formula today. On one hand, the M2 money supply and the LEI suggest a recession in 2024, which isn't great for the stock market. But on the other hand, past presidential elections and rate-cut cycles have triggered good times in the stock market.
A better way to invest
Rather than actually predicting what the market will do, the aforementioned stock market predictors do a better job of confirming our own biases. If we believe the market is going up, we simply concoct a formula that confirms our view; it's easy enough to find supporting data.
As investing great Warren Buffett once said, "Forecasts may tell you a great deal about the forecaster; they tell you nothing about the future."
If investors acknowledged the contradictory nature of many stock market predictors, they'd more likely follow advice from Peter Lynch, who said, "Dismiss all such forecasts and concentrate on what's actually happening to the companies in which you've invested."
A successful investing blueprint indeed starts with Lynch's recommendation: Investors should monitor the businesses they're invested in. In 2024, the stock market could be up or down, and the economy could contract or expand. But in any of these scenarios, there will be companies that perform well and set themselves up for greater success in the future.
But no matter which companies an investor chooses to invest in, they're almost always better off adopting a long-term mentality.
And that's because the stock market is unpredictable -- as much as people don't want that to be true, it is. A secret formula doesn't exist. But over time, good businesses increase in value despite market pressure and economic setbacks. That's why learning to hang onto investments through the ups and downs is crucial to success.
