One of my favorite opinion pieces of all time was an article published in the Guardian about five years ago entitled ‘Everyone is just totally winging it, all the time’. In short, it makes the point that every person, no matter which societal level they are on, is essentially blindly stumbling forward through life and that the competence that we ascribe to high-profile decision-makers is almost always not warranted.
I was reminded of the piece while watching this talk given by value investor Howard Marks (Trades, Portfolio) at the CFA Society of India. In it, he explains why investors should not attempt to forecast the future, and how doing so can lull you into a false sense of security.
The record of forecasters is not great
Marks began by stating the thesis of his case - that no investor can consistently win by guessing what will happen in the future:
“Most investors cannot see the macro-future better than anyone else. The record of forecasters is not great and I don’t believe that anybody has a great career by being right repeatedly about the direction of interest rates, currencies, commodity prices, the economy, or even guessing the direction of the market”.
He then referred to a quote by the economist John Kenneth Galbraith, which I think ties in very well with the Guardian piece I referred to earlier: “We have two kinds of forecasters: ones who don’t know, and the ones who don’t know they don’t know”. Marks continued:
“You must decide which you are. Are you going to bet your career and your performance on predictions about the macro, or are you not?...Most investors act as if they can see the future. Either they think they can - some do - or they think they have to try to, in order to be a success in the investment business”.
The danger lies in thinking you know
Contrary to what you might think, there is nothing wrong with embracing your own cluelessness about the future. On the contrary, it is the only prudent course of action. The real danger lies in thinking that you know more than you actually do. Marks makes this point by invoking cognitive psychologist Amos Tversky:
“It’s frightening to think that you might not know something, but more frightening to think that, by and large, the world is run by people who have faith that they know exactly what’s going on”.
I think this strikes at the core of the problem. No one wants the portfolio manager or hired expert to say ‘I don’t know’. The vast majority of people are very uncomfortable with uncertainty. This leads to a feedback mechanism wherein those with the hubris to claim that they can forecast are elevated ahead of those with the humility to admit that they cannot.
As individuals, there is little we can do about this sorry state of affairs at the political level, but we can make sure that we do not fall prey to such misplaced beliefs about our own competence in our personal lives and portfolios. You cannot predict the future, but you can make rational appraisals of the present. Stick to understanding the here and now and you will find that you will go a lot further in the long run than those who believe they have mastered uncertainty.
Disclosure: The author owns no stocks mentioned.
Read more here:
- Seth Klarman: Is Investing an Art, a Science or a Craft?
- Warren Buffett: How to Spot a Bubble
- What Lies in Store for Financial Stocks?
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