Imagine the chutzpah it takes to say to yourself that you know definitively what the global economy is going to look like in six months. Now imagine thinking you could take this certainty about the future and use it to predict exactly which investment markets would rise and fall as a result – so not only can you see the economy’s future, but you can predict how all of the other investors will react to it!
Now imagine saying you could do this sort of thing consistently, out loud in front of other people.
Now imagine charging them money for it.
At this point, you’re selling magic beans. A talking dog. A singing frog. A goose that lays golden eggs. You’re a medicine show.
When I explain like this, the whole notion sounds crazy. Crazy sells.
The internet is filled with people who will believe nearly anything they read, if presented in the right circumstances. In part, it’s because they don’t spend a lot of time considering how unlikely it is that someone is willing to sell you the future for twenty dollars a month. In part, it’s because they do know better, but deep down they still want to believe. So if you speak with enough conviction, and don’t get asked too many questions about whether or not you’ve been right about these predictions historically, you can make a lot of money. The outcome doesn’t matter, you’re filling a void of rampant doubt with the opiate of your professed certainty and confidence.
So what’s the right answer? For me, it’s always been accepting the limitations inherent in trying to understand the future and arranging your bets in such a way that you can succeed despite a multitude of potential outcomes. Building durable portfolios, expecting risk to eventually be rewarded and accepting the fact that there will be good times and bad.
Again, the alternative is magic beans. Do you believe in magic?
Howard Marks wrote about the difference between having an opinion about the future versus betting heavily on that opinion as though it’s the only version of the future that will come to pass…
Many investors think their job requires them to develop a macro outlook and invest according to its dictates. Successful stock pickers or real estate buyers often make pronouncements regarding the macro outlook, even in the absence of evidence linking their investment success to accurate macro forecasts. Nonetheless, since macro developments are so influential, many people think it’s downright irresponsible to ignore them when investing. Yet:
Most macro forecasts are likely to turn out to be either (a) unhelpful consensus expectations or (b) non-consensus forecasts that are rarely right.
I can count on one hand the investors I know who successfully base their decisions on macro forecasts. The rest invest from the bottom up, one investment at a time. They buy when they think they’ve found bargains and sell things they consider overpriced – mostly without reference to the macro outlook.
It may be hard to admit – to yourself or to others – that you don’t know what the macro future holds, but in areas entailing great uncertainty, agnosticism is probably wiser than self-delusion.
I found myself nodding my head in agreement with the entire piece. It’s impossible to spend more than five years paying close attention to the macro calls of experts and not come to this very conclusion. Unless you really, actively, don’t want to. I admit, the alternative – a complete fantasy – is very attractive and emotionally satisfying.
It’s hard not to have an opinion. It’s hard to ignore that opinion when allocating investment dollars. And when professionals share their opinions, it’s hard to avoid attaching weight to them – especially given how good some professionals are at presenting these views and expressing all the reasons for why we should heed them.
The really difficult part is that sometimes someone buys a fistful of magic beans and they do end up with an enormous beanstalk sprouting up in the yard overnight. And when you see it – someone making a big bet on a particular version of the future economy coming true – the fantasy that you too could experience this becomes more real. You become more susceptible to the fantasy, more willing to be the next customer. “I’ll take some beans as well, thank you!” Unfortunately, there’s only one Jack, we don’t live in a world full of Jacks in a landscape teeming with beanstalks. Most would-be Jacks end up empty handed – the cow has been traded for nothing, they are worse off for having believed. But that doesn’t make for a great story, so the tale that gets told over and over again is the one with the magic.
There is an unlimited slate of possible economic outcomes stretching out before us. Investing with the understanding that any number of them might come true is the sensible course of action. For the majority of people, it’s the only reasonable choice.
Latest Memo from Howard Marks: Thinking About Macro (Oaktree)