Consulting the 2014 Crystal Ball

 | Dec 16, 2013 | 4:00 PM EST  | Comments
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I spent some time during the weekend preparing for a talk I am giving later this week. The subject matter is about the market in the year ahead. This time of the year it seems everyone wants to drag out their thoughts and predictions for the looming year.

In spite of a dismal track record all the pundits and strategists will produce exact predictions based on multi-factor, sophisticated models of the economy and the market. You will not be able to turn on a news show or a financial channel for the next several weeks without seeing a discussion and prediction about what 2014 has in store for investors.

There is a lot to talk about it when you look ahead. The big question is tapering, of course. We know they are going to and it looks as if it will be sooner rather than later. How much will they slow the bond purchases and what is their time frame for reducing the QE programs to zero? How will interest rates react to the news? Will stocks finally correct when we get a tapering. What direction will Janet Yellen take the Fed? All of these are good questions and lots of fun to debate.

What about the political outlook for 2014? Will get a debt ceiling extension that avoids another shutdown of the federal Government? Will the fracture between the Tea Party and mainstream GOP weaken the already-battered party? Who will fare well in the mid-term elections and what will the impact on government policies and taxes be? Does the President lose political capital in the aftermath of the Affordable health Care rollout problems? Will any progress be made on immigration reform and what are the economic consequences? Again, these are sound question and can provide hours of lively debate.

Will we see real jobs creation next year? Will the workforce participation rate continue to decline? Will short-term and lower-paying job continue to be the dominant driver of lower unemployment? Will U.S. corporations begin to spend their vast hordes of cash on expansion and growth initiatives that create higher paying jobs in 2014? Will real estate markets continue to improve and ignite construction jobs next year? These are complex questions and make for great debate.

If you look around the world the list of potentially market moving questions becomes still greater. What will the Chinese wish us to believe about their markets and economy next year? Will Abenomics continue to work in Japan? When does Germany get tired of all the problems out of the southern European nations and close the piggy bank? What is going on Russia and what are the potential economic consequences, particularly for the oil and gas markets.

The Middle East is always one step away from disaster and this year will be no different. Will the Iranians back don on the nuclear issues of continue to work on a weapons program? Will the conflict in Syria ever come to some sort of conclusion? All of the questions have the potential to move markets.

The list of question really expands when we look to individual companies in the coming year. Will Apple (AAPL) have a new hit product next year? Will Tesla (TSLA) have any additional problems with their high end electric cars? Will Amazon (AMZN) offer drone delivery in 2014? Can J.C. Penney (JCP) turn the troubled ship around? Can Blackberry (BBRY) survive? Who will Icahn or Ackman go after next? We could have hours of entertaining discussion on what lies ahead for individual companies.

Which questions should investors focus their attention on as we approach 2014? Which ones are the questions to which the answer might lead to profits in the future? The correct answer is none of the above. While they are all fun to talk about and it can be an entertaining, and even a useful exercise, to have these discussions, they have nothing to do with your long-term investment success.

The answers are not knowable in advance and any conclusion is just a guess. You may be willing to make a wager on your guess about next year, but I think it is a foolish and overly risky endeavor.

There are only two questions that matter for a long-term investor. If you answer these two correctly, you will outperform most investors and traders and never expose yourself to the possibility of an unrecoverable loss.

Is it cheap?

Is it Safe?

These are the only questions that matter.

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