Uncertainty, forecasting and The Real Housewives – what they have in common

By David B. Armstrong, CFA | May 13, 2020 | Invest My Wealth, Weekly Market Commentary

There is no dearth of writing on the current uncertainty in the world, markets, or the economy. I couldn’t read it all if I tried, but I’ve read a decent amount. Here are my thoughts on uncertainty as they relate to regular old investors with normal goals and objectives:

• Pour gasoline on a pile of dry wood, light it with a match, and you will get a bonfire. That’s a known cause and effect…with limited, if not zero, variability in outcome.
• Unlike the above, no one knows anything about the cause and effect of what’s happening in the world right now. You can’t assume any cause and effect based on historical precedence, because I’ll argue there is none.
• You have no idea how something will turn out until it presents itself in the future. DUH.
• There is too much randomness right now to predict what will happen tomorrow, this summer, next fall, or even next year. Acknowledging that is okay; ignoring that is not okay.
• No one has access to any secrets – everything that is known, knowable, or even accurately assumable, is currently baked into the prices of all assets.
• The way to make a return on investments is by putting money to work today based on unknowable things that will develop out in the future.
• Most people know they can’t predict the future, but they experience difficulty with that logic.
• People are dissatisfied with their inability to predict the future, so to satisfy themselves, they do it anyway…hence, forecasts. They make people feel good, especially if they feed into any bias.
• Uncertainty can be mitigated by employing an unemotional process (or set of rules), but I’ve found if a process does not match an investor’s bias, they will eschew it.
• A process can seem too simple or unsophisticated, which will lead investors to dismiss it as ineffective…yet they will still believe forecasts!
• Uncertainty can lead to investors choosing to index or benchmark using an ETF. However, that game may be changing to favor active management if people want to avoid automatic investment in companies that will suffer in a new post-COVID economy.
• Some investors are convinced of their forecast or thesis of the future yet lack the humility to define conditions for admitting when they are wrong.
• More people should read Annie Duke’s book Thinking in Bets (already a classic in my mind) where she writes, “[Good poker players] embrace uncertainty and, instead of focusing on being sure, they try to figure out how unsure they are, making their best guess at the chances that different outcomes will occur.”
• People gloss over probabilities…When the probability of being right is 90%, ten times in 100 will actually be wrong. Just ask the 2020 San Francisco 49’ers.
• People, including me, hate saying “I don’t know” when in fact, it’s probably the most accurate and truthful answer to any question asking for postulation. There is a limit to what anyone can know and that even more true when something is truly unknowable.
• Uncertainty is uncomfortable, but baseless forecasting is not a special potion to make it better.

Be careful what you do with forecasts. They are interesting and entertaining, but so is watching The Real Housewives.

Sometimes, things may seem obvious, but that’s the exact point at which you should question it. I’m firm in my conviction that the best solution to the uncertainty we are facing is identifying the time horizon you have for your investments and adjusting your exposure to risk accordingly.

Keep looking forward,
Dave

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