The future of Futures – will you take your chances?
In the investment world there is no other Truth and Certainty. Next time you hear Bull Run, Vaccine, Economy firing, Election forecasts, remember expert opinion is always a chance, and no matter who the expert is, it is always a chance only, write value investors Tanvi Mehta, Ramaswamy Ranganthan and Sudaarshan R.
Stephen Hawking was one of the most gifted scientists in this world, majority knew that Stephen was diagnosed with amyotrophic lateral sclerosis (ALS), or Lou Gehrig’s disease, when he was only 21. ALS affects the nerve cells involved in voluntary muscle movement, decreasing a person’s ability to move and speak over time.
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Usually, symptoms develop after age 50, and lead to death within a few months or years. Stephen was unlucky, but this never dampened his spirit a bit, when doctors diagnosed Hawking with ALS at the extremely young age of 21, they predicted he would only live a couple of years.
Hawking's went on to live till the age of 76, defying what the doctors told that at best he would live for 2 years. Think about living a life with a time bomb ticking and then with the passage of 2 years, counting his fortune and then after a point it may just have been an uncertain event. Death is after all an uncertain event in terms of its timing but a certainty that every life will die eventually.
Life and Business in terms of its milestones are always and will always be uncertain, certainty and accuracy are doomed. If you were to ask Jeff Bezos, did he dream of becoming the world’s richest man, the answer would be an absolute NO. Tail Events in life or Business are never planned and Tail events happen just like life happens.
Morgan Housel elucidates this brilliantly: “I expect there to be one or two recessions in the next decade. I have no idea when either will arrive.” Those aren’t contradictory statements. One is an expectation, the other is the rejection of a forecast. It’s an important difference. It’s one thing to look at history and see that recessions and bear markets have occurred with some frequency, and forming a baseline of what to expect in the future. It is quite another to predict the precise timing of either event. And it’s another thing entirely to devise a strategy that reacts to those predictions.
The world is filled with forecasts, and in many ways certainty of things to happen, when you just go back to the past and figure out the base rate of economists, analysts, and doomsday professionals, the probability of what they are starting to happen don’t happen as often as they scream on television channels and once in a blue moon things do happen, we think that is because nature wants to kind to its own children.
Charlie Munger has unequivocally clarified this, “People have always had this craving to have someone tell them the future. Long ago, kings would hire people to read sheep guts. There’s always been a market for people who pretend to know the future. Listening to today’s forecasters is just as crazy as when the king hired the guy to look at the sheep guts. It happens over and over and over.
The human mind is always dwelling into the future, and is always wanting to know the future and this happens more in the stock market where timing the market is a futile effort, studies after studies have demonstrated that getting it right is next to impossible, but barring a few who have given up and wisely so and other minority who invest really don’t bother about macro events, most want to target Dow at 30,000 or Sensex and Nifty at certain levels. There is an obsession to hear and figure out what these experts have to say when there is enough research to back the truck, which says that their guess is close to a 50/50 at best, which means its throwing the dart and with every shot you take the probability is always 50/50.
“How did I ever get into the predicting business?” asked one of the best, Isaac Asimov, at the top of his game in the mid-1960s. He was convinced that “predicting the future is a hopeless, thankless task, with ridicule to begin with and, all too often, scorn to end with.”
Marc Faber, the author of ‘Gloom, Boom and Doom’ report, said that in 2009, due to money printing United States will suffer from hyperinflation and interest rates will move up. The dire certainty of the prediction is a far cry and US still has its inflation under control of 2% and this has surprised even economists who said, money printing will lead to inflation (they didn't say hyperinflation), but the American economy has been resilient and has put up with the ever increasing balance sheet of the fed and inflation is not in sight.
“I don’t pay any attention to what economists say, frankly,” Warren Buffett said two years ago. “Well, think about it. You have all these economists with 160 IQs that spend their life studying it, can you name me one super-wealthy economist that’s ever made money out of securities? No.”
The Oracle of Omaha cited the example of the economist John Maynard Keynes, who went through periods of heavy losses trading currencies in the 1920s and 1930s and stumbled while speculating on stocks. Buffett said, Keynes faltered using top-down economic forecasts such as credit cycle predictions.
But when Keynes switched to a value philosophy focused on owning stocks of a few well-run companies over the long term, his investment performance improved, Buffett noted.
Now let’s dwell onto what the world said when President Donald Trump won the election in America.
“Donald Trump’s first gift to the world will be another financial crisis": Headline in the U.K. Independent.
“I have no stocks. I advise people not to invest in the stock market, not now. Way too dangerous”: Film maker Michael Moore, August, 2017.
“It really does now look like President Donald J. Trump, and markets are plunging. When might we expect them to recover? A first-pass answer is never… So we are very probably looking at a global recession, with no end in sight”: Paul Krugman of the New York Times the day after the election. (Paul Krugman is a Nobel Winner in Economics)
What has happened in the United States since Donald J Trump has assumed office, the stock markets rose to dizzying heights, the bull market in America continued, with Dow and S&P500, hitting Life time highs, Unemployment fell to historic lows and forget hyperinflation, inflation was always undershooting and economy was firing in all cylinders.
Now, had you listened to any of the above experts, including the great Nobel prize winner, you would have sat out in what is termed as Americas, one of the finest Bull Markets and would be busy licking your wounds when stocks were levitating to dizzying heights.
Now go back a little in history, and focus on the US elections. Who was the favourite to win? Hillary Rodham Clinton. Period. Who won? Trump. Period. Opinions will always flip when things don’t go the expert way. Clinton did not take care of white people’s rights, she was pro immigrant, which played a vital role, while Trump focused on being American. The outcome of the Brexit was a shock, pollsters were projecting a comfortable win for being within the EU, and the result went exactly the opposite.
The precision of Math is singularly focussed on results and it’s taken as the law of gravity in physics, Munger rightly calls this Physics Envy. Most Pollsters suffer from physics envy.
What if we tell you that there is a hedge fund which started in 1994 and named Long-Term Capital Management (LTCM) led by Nobel Prize-winning economists and renowned Wall Street traders. Myron Scholes is a Nobel winner in economics and Black and Scholes are widely used for options valuation.
The big question is looking at the profile and brilliance, will you invest your hard earned money? It would be a resounding YES. We wish you the best of luck, the firm went bankrupt in 1998 and the Fed had to bail it out. For the sake of sounding repetitive, all expert opinions are best only opinions, and if that expert happens to be Nobel in Economics, then be more cautious as their track record is highly poor, the academic world works very differently than the real world.
Here’s a quote from Charlie Munger on the same subject from the 2003 shareholder meeting:
Black-Scholes is a know-nothing system. If you know nothing about value — only price — then Black-Scholes is a pretty good guess at what a 90-day option might be worth. But the minute you get into longer periods of time, it's crazy to get into Black-Scholes. For example, at Costco we issued stock options with strike prices of $30 and $60, and Black-Scholes valued the $60 ones higher. This is insane.
The current prevailing situation of pandemic will throw up more forecasts, predictions or even educated guesses. The two-pronged forecasts are Economy and Vaccine. Both of these are highly unpredictable and highly uncertain with no certainty, at best it’s a guess. Most experts are calling the revival of the Index in the market a new Bull Run, everybody will become a health expert and predict that a vaccine will be round the corner, some are stating September, some are stating December, these are at best looking for certainty in an uncertain world marred with too many variables, there are others who are stating it would take 2 years for the vaccine to come. Now who do you believe? Your guess is as good as ours.
What will the stock market do? What will the economy do? Wish we had an answer, but truth be told, even experts don’t have an answer, just that they won’t agree. The best Fund Manager Peter Lynch had said, that nobody can predict interest rates, the future direction of the economy or the stock market. Dismiss all such forecasts and concentrate on what’s actually happening to the companies in which you have invested. What a wise advice!
For all the certainty fever, we will leave you with some irrefutable facts from Snowball Book.
DOW JONES INDUSTRIAL AVERAGE
December 31, 1964
December 31, 1981
During these 17 years, the size of the US economy grew 5 fold. The sales of fortune 500 companies grew 5 fold, yet during the 17 years the stock market went nowhere. Buffett went to further explain, what you’re doing when you invest is deferring consumption, and laying your money now to get more money back at a later date time and there are only 2 questions. One is how much are you going to get back? And the other is when? Period.
In the investment world beyond this, there is no other Truth and Certainty. Next time you hear Bull Run, Vaccine, Economy firing, Election forecasts, remember expert opinion is always a chance, and no matter who the expert is, it is always a chance only.