Imagine the chutzpah it takes to tell yourself you know finally what the world economy will look like in six months. Now imagine if you could use this certainty about the future and predict exactly which investment markets would rise and fall as a result – this way you can not only see the future of the economy, but also predict how all other investors will react to it!
Now imagine if you could do this consistently and loudly in front of other people.
Now imagine charging them money for it.
At this point you are selling magic beans. A talking dog. A singing frog. A goose that lays golden eggs. They are a medical show.
When I explain it like that, the whole idea sounds crazy. Crazy sold.
The internet is full of people who will believe almost anything they read, when presented in the right circumstances. In part, it’s because they don’t spend a lot of time thinking about how unlikely anyone is willing to sell you the future for twenty dollars a month. In part, it’s because they to do Know better, but deep down they still want to believe. So if you speak with enough conviction and not be asked too many questions about whether or not you were historically correct with these predictions, you can make good money. The result doesn’t matter, you fill a void of rampant doubt with the opiate of your declared certainty and confidence.
So what’s the correct answer? For me it has always been accepting the limitations inherent in trying to understand the future and arranging your bets so that you can be successful despite a myriad of potential outcomes. Build lasting portfolios, expect the risk to be rewarded at some point, and accept 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 and betting heavily on that opinion, as if it were the only version of the future that will come …
Many investors believe that their job requires them to develop and invest according to the macroeconomic outlook. Successful stock pickers or homebuyers often make statements about the macro outlook even when there is no evidence linking their investment success to accurate macro projections. However, because macro developments are so influential, many people find it utterly irresponsible to ignore them when investing. Yet:
Most macro projections are likely to prove to be either (a) unhelpful consensus expectations or (b) inconsistent projections that are seldom correct.
I can count on one hand the investors I know who successfully base their decisions on macro forecasts. The rest of them invest from the bottom up, one investment at a time. They buy when they think they have found a bargain and sell what they think are overpriced, mostly without reference to the macro outlook.
It may be hard to admit to yourself or others that you don’t know what the macro future holds, but in areas of great uncertainty, agnosticism is probably smarter than self-deception.
I found myself nodding my head in agreement to the whole piece. It is impossible to pay attention to expert macro calls for more than five years and not come to this conclusion. Unless you really don’t want to be active. 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 this opinion when allocating investment funds. And when professionals give their opinions, it is difficult to avoid weighting them – especially when you consider how good some professionals are at presenting those views and expressing all the reasons why we should heed them.
The really difficult part is that sometimes someone buys a handful of magic beans and ends up sprouting a giant beanstalk in the garden overnight. And when you see it – someone who makes a big bet that a certain version of the future economy will come true – the fantasy that you, too, might experience this becomes more real. You become more prone to the imagination, more ready to be the next customer. “I’ll have some beans too, thank you!” Unfortunately there is only one Jack, we don’t live in a world full of Jacks in a landscape full of bean vines. Most would-be boys get nothing – the cow was swapped for free, they are worse off because they believed. But that doesn’t make a great story, so the story that is told over and over is the one with the magic.
There is an unlimited range of possible economic outcomes ahead of us. Investing with the knowledge that any number of them could come true is the sensible course of action. For most people, it’s the only sensible choice.
Latest memo from Howard Marks: Thinking About Macro (Oaktree)