The most eye-catching predictions are usually the biggest and boldest… The Dow up to 20,000 points or down to 500 points… Gold up to $50,000 or down to $300.
So, what will happen to the Aussie stock market, the Dow or the price of gold in 2012?
Well truth be told… in such a volatile market we’ve no idea.
But that won’t stop us making a prediction… even if it’s wrong. Because as we’ll explain (with apologies to Alfred, Lord Tennyson), “It is Better to Predict and be Wrong Than Never Predict at All”.
But before we give you our stock market predictions for 2012, take a moment to read this quote from Paul Tudor Jones, the famous hedge fund manager:
“The accumulation and then the repayment of debt basically drives every economic cycle that there is. Right now we have probably explored the envelope with regard to mortgaging our future earnings. The next part of this cycle will be the repayment of what we’ve enjoyed now for the past four or five years… We’re in the largest post-war business expansion cycle in history.”
He should know what he’s talking about. He’s the 336th richest person in the world.
But what’s most interesting about the quote is when Jones said it.
It was 25 years ago… in 1986.
He was talking about the 1980s stock market bull-run. At the time, Jones believed the market was heading for a crash. Turns out he was right… and wrong.
In 1986 Paul Tudor Jones and his chief analyst, Peter Borish, predicted the stock market would crash in March or April 1988. And not just any old crash, it was going to be the big one. So, what happened to the Great Crash of 1988?
That’s right, it never happened.
But Paul Tudor Jones wasn’t completely wrong. It’s just that the Great Crash of 1988 came early. It became known as the 1987 stock market crash.
The point is, even though Jones got the date wrong he still made a 201% gain for his clients. Why? Because he wasn’t tied to the date. The date was a guide. More important was that he understood the boom wasn’t sustainable.
But that’s not all. Despite knowing a crash was on the way, he also believed the market would gain another 40% before it crashed. This is exactly what happened.
He figured there was no point sitting and waiting for the market to fall when there was the chance to make money from the market going up.
Bottom line: He made a prediction… got part of it wrong… but still made a bucket load of cash.
You see, predicting the future is part of being an active investor. But most investors have been brainwashed to think investing in a diversified portfolio will make them money in a rising market and protect them in a falling market.
That led most investors to lose a lot of money in what they thought were safe investments during the 2008 stock market crash.
They thought diversification could save them. It didn’t. As the following chart shows:
What we’re saying is this… Some will say stock market predictions are pointless, because no-one can predict the future. We argue that predictions are vital to understanding what could happen and how it could help you make money and protect your wealth.
So, here’s our prediction for next year: we believe by the end of next year stocks will be no higher or lower than they are today. But that doesn’t mean stock prices won’t move. In fact, we’ll say in 2012 markets will be just as volatile as they’ve been in 2011.
If that scares you, it shouldn’t. Because a volatile market could give you the chance to make a lot of money.
However, before you think about making money you’ve got to think about saving money. That’s why we recommend investors put most money in “safe” assets first:
Before you say anything, yes. We know it doesn’t add up to 100%. The idea is you choose the level of exposure you’re comfortable with. Remember, this is your capital. This is what you’ve already worked for… you need to make sure you don’t destroy it by risking too much of it.
Of course, you have to risk something. You can only make more money by risking money. That’s where your “punting” money comes in. Not surprisingly, our preference is small-cap stocks. Mainly because you get leverage without borrowing from a bank or financial institution.
And unlike other forms of leverage (CFDs, futures, some options strategies), you can’t lose more than you invest.
The sectors we’re looking at for next year are:
Naturally, there are other ways to put your “punting” money to work. You can use CFDs, futures or options. Just understand they require more attention and more active investing.
The thing for you to take away from this strategy and prediction is this…
Although we believe the market won’t be any higher or lower than today, 2012 will be very volatile.
In fact, it’s possible we could even see a 40% rally… followed by a 40% fall!
Long term our belief is that the volatile market will head south. But that won’t stop us taking a punt on potential shorter-term gains.
Because if we do get another quick rally, that’s where small-cap stocks can benefit. And that’s why we’re still in this volatile market.
But whatever happens. Whether it’s a raging bull market, bear market or sideways market, you’ll have 85-95% of your money in relatively safe investments.
Whether we’re right or not, we won’t know for another year.
But at least if you’re actively watching this volatile market and you understand what’s happening, you’ve got a much better chance of protecting and building your wealth than most mainstream investors.
And as Paul Tudor Jones showed, it’s better to predict and be wrong, than never predict at all.
P.S. If you’d like to know which small-cap stocks I believe will benefit from a volatile stock market, click here to access my latest stock tips now…
From the Archives…
Stock Market Predictions
2011-11-25 – Kris Sayce
Stocks on the Australian Market Today – Three Things You Need to Know
2011-11-24 – Shae Smith
The Gospel of Gold and Silver
2011-11-23 – Kris Sayce
China’s Bubble Will Pop in 2012
2011-11-22 – Greg Canavan
ASX Stock Market Winners, Losers and the Newly Dumped
2011-11-21 – Aaron Tyrrell
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Written by Kris Sayce
Kris Sayce is Editor in Chief of Australia’s biggest circulation daily financial email — Money Morning. (You can subscribe to Money Morning for free here).
Kris is also editor of Australian Small-Cap Investigator, his small-cap stock research service, where he provides detailed analysis on some the brightest, smallest listed companies on the ASX.
If you’re already a subscriber to these publications, or want to follow his financial world view more closely, then we recommend you join Kris on Google+. It’s where he shares investment insight, commentary and ideas that he can’t always fit into his regular Money Morning essays.