{"id":8874,"date":"2026-10-12T10:40:13","date_gmt":"2026-10-12T08:40:13","guid":{"rendered":"https:\/\/hallmarkpro.co.za\/?p=8874"},"modified":"2026-10-12T21:54:51","modified_gmt":"2026-10-12T19:54:51","slug":"probability-not-predictability","status":"publish","type":"post","link":"https:\/\/hallmarkpro.co.za\/?p=8874","title":{"rendered":"Probability, Not Predictability!"},"content":{"rendered":"

by Rob McGowan<\/strong><\/p>\n

I often find myself looking ahead at the financial markets, wondering, probably with plenty of my own biases, hopes, expectations and experiences influencing my thinking, WHAT’S NEXT?<\/strong><\/p>\n

But the reality is that nobody really knows how the markets will pan out tomorrow, next month or even next year.<\/p>\n

Of course, when looking back at past market events, we can often see what appear to be obvious signs and indicators. That’s hindsight for you. It has a way of making things seem far more predictable than they actually were. But if you’re honest with yourself, you realise how extraordinarily difficult it is to work out, with any consistent degree of confidence, what comes next.<\/p>\n

Financial markets are influenced by an enormous number of variables: interest rates, inflation, economic growth, corporate earnings, geopolitical events, investor sentiment and countless unexpected developments and chain reactions. Add billions of people, each with their own expectations, fears, ambitions and interpretations of events, together with billions of computer-driven decisions, and you’ll begin to appreciate the complexity of the environment we’re dealing with.<\/p>\n

It’s a noisy place! Opinions, forecasts and predictions are constantly being sloshed around, and we have a remarkable tendency to believe that, if we listen carefully enough, analyse enough information or find the right expert, we can somehow work out the direction and timing of the markets.<\/p>\n

Yeah, right!<\/p>\n

What’s interesting, though, is that we know we cannot predict the future, yet we still find ourselves searching for clues and perspectives that might help us do precisely that. This is especially true during periods of heightened uncertainty, such as the environment we find ourselves in today.<\/p>\n

So, if we accept that predicting the markets consistently is beyond our reach, how do we improve our odds of investment success?<\/strong><\/p>\n

Get away from the noise<\/strong><\/p>\n

First things first: get away from the noise.<\/p>\n

Rather than trying to anticipate every economic development, political event or market movement, we should focus on what we can reasonably understand and influence. This means shifting our attention away from predictions and towards probabilities.<\/p>\n

Probability is, in my view, a cornerstone of a successful investment strategy. We cannot know with certainty what will happen, but we can make informed decisions based on the characteristics of different assets, their underlying fundamentals and what history can teach us.<\/p>\n

Everyone knows Google! One of the things that set Google apart in its early days was its use of an algorithm called PageRank, developed by its founders, Larry Page and Sergey Brin. It used the links between webpages to help estimate their importance and rank search results. The interesting point is that it didn’t need to predict exactly what someone would search for next. Instead, it used the available information to make a better assessment of which pages were likely to be relevant.<\/p>\n

Coming back to investment, we know from a long history of market experience that equities have offered the potential for long-term, above-inflation wealth creation. By owning shares in productive businesses, investors participate in the potential growth of earnings, cash flows and dividends. Over time, successful businesses can expand, innovate, improve productivity and reinvest their profits, creating opportunities for shareholders to benefit.<\/p>\n

But we also know that the market prices of these businesses can fluctuate substantially, sometimes moving well above or below their intrinsic values. Even excellent businesses can make poor investments when purchased at excessive prices, and equity markets can experience prolonged periods of disappointing returns.<\/p>\n

On the other hand, cash and money market investments generally offer greater short-term stability and liquidity. They can provide a useful reserve during periods of market turmoil and help protect us from having to sell growth assets at an unfavourable time. However, after allowing for inflation, tax and fees, the purchasing power of those investments may erode over time.<\/p>\n

Neither outcome is certain, but the underlying characteristics of these asset classes are quite different, and so are the probabilities of achieving different investment objectives.<\/p>\n

Asset allocation and diversification<\/strong><\/p>\n

This brings us to one of the most important principles of investing: asset allocation.<\/p>\n

If your objective is to achieve above-inflation growth over the long term, equities have historically offered a greater opportunity to achieve that than cash. But if you need certainty that your investment will be available in the short term, without the risk of having to sell at a loss, equities can lead to disappointment.<\/p>\n

Therefore, we should recognise that different asset classes serve different purposes. Cash provides liquidity and relative stability. Interest-bearing investments can provide income and balance. Growth assets, such as equities and appropriately selected property investments, offer the potential for long-term capital growth and increasing income.<\/p>\n

The challenge is to determine the appropriate balance between them, taking into account our objectives, investment horizon, income requirements and ability to withstand losses.<\/p>\n

Diversification is equally important. By spreading our investments across different asset classes, markets, debt instruments, shares and businesses, and perhaps investment styles, we reduce our dependence on any single investment or outcome.<\/p>\n

Diversification does not eliminate risk or prevent losses, but it can reduce the damage that arises when a particular investment or market disappoints. The benefit depends on how the investments behave in relation to one another. If we hold several investments that all react in much the same way to the same events, we may have less diversification than we think.<\/p>\n

Again, this is a probability concept. By spreading our investments across different sources of return, we reduce our reliance on any one of them delivering the goods.<\/p>\n

The objective is not to predict the winning asset, asset class or investment manager in advance. It is to construct a portfolio that gives us a reasonable prospect of achieving our objectives without requiring us to get every decision right.<\/p>\n

Valuation: what price are we paying?<\/strong><\/p>\n

For me, another fundamental consideration when choosing an investment manager is their attitude towards valuations.<\/p>\n

This is a critical part of improving our probability of success. Ultimately, the price we pay for an asset has a significant influence on the return we can expect to earn from it.<\/p>\n

Consider a simple example. Imagine an investment that generates an annual dividend of R100. If we purchase it for R1,000, the dividend yield is 10%. If we purchase exactly the same investment for R1,250, the dividend yield falls to 8%.<\/p>\n

The underlying investment has not changed. The income is still R100. The only difference is the price we paid, and therefore the income yield we receive on our investment.<\/p>\n

Of course, dividend yield is only one component of an investment’s total return. We must also consider the sustainability and potential growth of the dividend, as well as the prospects for capital appreciation or loss. Nevertheless, the principle remains: the price we pay matters.<\/strong><\/p>\n

This is why I believe an investment manager’s philosophy towards valuations is so important. Different investment approaches can arrive at very different conclusions about what constitutes an attractive investment, and what price is justified.<\/p>\n

How, for example, does a manager justify owning an expensive share? Is the premium valuation supported by realistic expectations of future earnings growth, or does the investment case depend on increasingly optimistic assumptions? Are they paying for proven fundamentals and sustainable cash flows, or for a future that may or may not materialise?<\/p>\n

Different investment philosophies place different emphasis on growth, quality, momentum and intrinsic value. While there is no single formula for determining what an asset is worth, I believe it is important to understand the reasoning behind the price being paid, and whether the expected return adequately compensates for the risks involved.<\/p>\n

Ultimately, even an excellent business can make a poor investment if too much is paid for it.<\/p>\n

Markets can become overly optimistic or pessimistic, and prices do not always reflect the underlying economics of an investment. While we cannot predict when those differences will correct themselves, a disciplined approach to valuation can help us avoid overpaying and improve the returns available to us over time.<\/p>\n

It is not about knowing when the market will rise or fall. It is about understanding what we are buying, what it is worth and what we are paying for it.<\/p>\n

We cannot predict the future, but we can prepare for it<\/strong><\/p>\n

Ultimately, successful investing is about understanding the characteristics of different investments, recognising the probabilities involved and making sensible decisions in the face of uncertainty.<\/p>\n

We cannot eliminate market risk, and we cannot guarantee investment outcomes. But we can focus on the things that matter: investing in productive assets for the long term, allocating our capital appropriately, diversifying our exposure, paying attention to valuations and maintaining discipline when markets become unsettled.<\/p>\n

We may never know what tomorrow’s market will bring. But we do not need to.<\/p>\n

The goal is not to predict the future. It is to build an investment strategy that does not depend on being able to predict it.<\/strong><\/p>\n

 <\/p>\n","protected":false},"excerpt":{"rendered":"

by Rob McGowan I often find myself looking ahead at the financial markets, wondering, probably with plenty of my own biases, hopes, expectations and experiences influencing my thinking, WHAT’S NEXT? But the reality is that nobody really knows how the markets will pan out tomorrow, next month or even next […]<\/p>\n","protected":false},"author":1,"featured_media":8875,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"page_builder":"","footnotes":""},"categories":[45],"tags":[],"class_list":["post-8874","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-investment"],"_links":{"self":[{"href":"https:\/\/hallmarkpro.co.za\/index.php?rest_route=\/wp\/v2\/posts\/8874","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/hallmarkpro.co.za\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/hallmarkpro.co.za\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/hallmarkpro.co.za\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/hallmarkpro.co.za\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=8874"}],"version-history":[{"count":3,"href":"https:\/\/hallmarkpro.co.za\/index.php?rest_route=\/wp\/v2\/posts\/8874\/revisions"}],"predecessor-version":[{"id":8936,"href":"https:\/\/hallmarkpro.co.za\/index.php?rest_route=\/wp\/v2\/posts\/8874\/revisions\/8936"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/hallmarkpro.co.za\/index.php?rest_route=\/wp\/v2\/media\/8875"}],"wp:attachment":[{"href":"https:\/\/hallmarkpro.co.za\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=8874"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/hallmarkpro.co.za\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=8874"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/hallmarkpro.co.za\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=8874"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}