Increasingly clients and contacts are sharing articles they find online with me. Each and every one of them is gratefully received.
What catches your attention or concerns you should be, and is, of interest to us too; please keep them coming.
With that in mind HERE’S AN ARTICLE Ian found quoting Warren Buffett quoting Rudyard Kipling, it’s most definitely worth a read.
The other thing Warren and I have in common is a penchant for cherry Coke.
I thought now might be a good time to share more of my understanding of what is going on.
I have no intention of claiming any of this as original; it’s an amalgamation of the insights gleaned from multiple, non-hysterical sources.
These include Warren Buffett, Howard Marks, Johan Norberg, Matt Ridley, Richard Thaler, Daniel Kahneman and others.
While I’m not watching or reading the news (sports news excepted) I’m reading. A lot. So, here we go.
For the most part, what you are reading and hearing are forecasts, i.e. they are not based on fact. They attempt to extrapolate the past to predict the future but, with so many moving parts, that’s really a fool’s errand.
So, to remain relevant, most are sufficiently vague and wide-ranging to be shown to be correct to a greater or lesser extent in the end. In total you will find forecasts covering every possible eventuality.
Forecasting is an industry of course, I hesitate to use the word “profession”. It’s essential that forecasters are correct to one degree or another, otherwise they soon find themselves out of work and having to become political lobbyists (I may have made that last bit up, but not the staying employed bit).
As such, forecasts offer great sound bites and headlines but rarely prove to be useful. That means you can’t make investment policy out of them, which is why I am happy to dismiss any forecast that somehow makes its way across my desk/screen.
My own forecast, for what it is worth, remains the same come what may. In the short-term, things are uncertain and unknowable; over the long-term they become certain and knowable and everything will be fine.
Over the long-term the average prevails.
In the long-term, we know (within a pretty tight range) how much economic growth there will be, where interest rates will be, how inflation and unemployment will pan out and what investment returns will be.
These long-term fundamentals are baked in, they can be relied on.
In the short-term we have a pendulum effect.
We swing back and forward, sometimes quickly, sometimes more violently. But always passing back and forth through the long-term averages.
As such the average is rarely the norm; we’re either under or over much more often than we realise. Think about that for a moment – at any particular time, the place we are in is NOT the average.
This is particularly true when it comes to investment returns, where the pendulum sweeps are more extreme than the underlying fundamentals.
[As an aside, risk/volatility is nearly always thought of as falls in investment values. That’s obviously mathematically nonsensical. Risk/volatility is both positive and negative, it applies to increases in investment values. Where it is more commonly known as profit and therefore regarded as nothing to be concerned about.]
So, if the fundamentals are pretty much known and more stable than investment returns, what is going on?
Psychology.
It’s not the event or data that causes big investment gains or losses, it’s the interpretation of the data.
The biggest change these last few weeks are not the fundamentals but the psychology of the market. The market psychology, the combined actions of every market participant, have swung/become negative.
Importantly, the pendulum never stops and its movement to one extreme or the other is the very thing that causes it to retrace its path.
The further we swing one way, the surer we can be that we will swing back the other.
Risk is, mainly, the likelihood of permanent loss of capital. Added to that is opportunity risk – the likelihood of missing out on potential gains.
Put the two together and we see that risk is really the possibility of things not turning out the way we want.
If we acknowledge the long-term fundamentals are pretty knowable and accept that the short-term is ruled by psychology, and that both are pendulum-like, then we have nothing to fear.
We will continue to swing back and forth through the average, as we always have, and everything will be just fine. Things will turn out the way we want.
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