The ability to somewhat accurately predict (or rather project/estimate) future events, be it macro or microeconomic, is a powerful tool for any active investor or businessperson. However, this “predictive capacity” should not be conflated with blatant speculation or an attempt at such. Indeed, several things cannot be predicted to any level of accuracy, and therefore it should not be attempted if one is keen on retaining one’s capital (on the presumption of making risky decisions on these predictions). A so-called prediction is more of a realization of what has already happened and what that must mean. The “what it must mean” is often inefficiently recognized by markets, allowing you to make significant profits. Or it may simply grant a de-risking opportunity.
All that is required to predict future movements are three things. Common sense (1), a deep understanding of the topic at hand (2), and pattern recognition skills (3). When these three are coupled, it can allow you to spot opportunities that the markets have not yet realized. Here, it is apparent the expression, “the markets are efficient” or “the markets are smarter than you” is not necessarily the case. That said, when comparing this, to a long-term strategy taken by, say, Warren Buffet, which is significantly less risky (long term) on a statistical basis, recognition must be made that most will never be able to achieve the level of analytical prowess that is required to consistently beat the markets, for several reasons, including (generally) a massive time commitment. Being wrong is probable, as a regression to speculation often materializes.
Why is this? Because people are impatient, and fail to wait for a clear opportunity, instead making themselves blind to the gaps in their premature thesis or argument. If this tragic mistake is made, the theory is but mere speculation.
Another mistake virtual speculators make is choosing too short of a timespan for their prediction to be fulfilled. Once this is revealed to the individual by the passing of time, it is made clear that though one may have believed they had sufficient knowledge to understand the series of events that would unfold, a vital gap in knowledge existed. This may be rooted in a fault in logical reasoning or not enough data points. Then, serious considerations should be made as to whether the thesis had any shred of validity in the first place. There are three choices the investor may make. Re-consider the thesis (1), exit the position (2) (which may not necessarily be a loss, in many cases the price is higher than the entrance position, inducing an unfortunate confirmation bias), or disregard the clear fault (3). Of the three, the former two are the only acceptable options (depending on the situation, 1 or 2 may be more appropriate than the other).
It is very clear mindset plays an important role in active investing. A sense of urgency to find a gap in the efficient market (let’s take the example of finding a severely undervalued company) often leads to failure. Rather, a passive research approach should be taken, where it is blatantly clear to the un-excited mind that an opportunity is present.
A piece of guidance, obvious for some, though not for others, is to “take the path less traveled” when searching for value opportunities. The biggest speculative events of all time occur inherently when many eyes are present. Here, the markets are “extremely forward-looking” or just plain wrong (if one is discussing speculative bubbles). Take the dot com bubble. The valuations were going to be eventually correct, for some companies. For others, well, they’re gone now. So, at least you’ll avoid this.
Refer to history
Economic history is an important predictive tool. Though, proceed with caution, as more money has been lost than gained by making bets due to a perception that what was happening “then” was similar enough to what was happening “now”. This is where a common phrase is once again not so useful.
“History repeats itself”.
Taken too literally, and you’ll probably make some bad decisions. The more accepted term, “history rhymes”, rings more true, but only just (in the context of making specific predictions). Without an understanding of the differing variables which influence an outcome (you’ll most likely never collate this), it is impossible to predict anything with any level of accuracy sufficient for long-term success.
Therefore, historical analysis is a complementary tool, and almost never a centerpiece of a predictive arsenal. Another suggestion: differentiate between primary and secondary sources and affirm their validity through actual experts or sufficient authorities. Too often there are false stories or claims taken as fact by the general populace. This is another reason it should be a complementary tool, sometimes taken with a grain of salt. Some incidents are poorly documented (while others are not). The level of weight they hold should be commensurate to the degree of certainty historians have. That said, this is only the first so-called, “filter”, in determining whether it should be considered at all in your theory as, history doesn’t necessarily repeat or rhyme where you think it will (or where you want it to).
Have a deep (and accurate) understanding of supply chains. For this, it is advantageous to acknowledge the fundamental principles of money as this can be applied to any commodity or product. Recognizing the interplay between stock and money is worthwhile for everyone. It is not a requirement to understand it on the basis of attempting to trade securities, commodities, or currencies.
Though I made the Warren Buffett contrast above, the value investing which he has partaken in is simply predicting future price action based on what has already occurred. In this instance, an unjustifiably low market price relative to the inherent value, is calculated given the balance sheet and income. Hence, it may be misleading to contrast the two. That said, with regard to macroeconomics, the story is different. The complexity severely complicates things.
Only some people have what it takes (for lack of a better term), to analyze the markets to the level of accuracy where it is monetarily worth it. Those who do should tread carefully, never permitting ego impact analysis and decision making. I cannot advise anyone to take this active approach of investing, as 98 times out of 100 (guestimate), over the extremely long term, it ends in failure, driven by a regression to the mean (human nature often brings us to speculate).