According to Xinhua News Agency, on July 21, local time, US President Biden announced his withdrawal from the 2024 presidential election. After announcing his withdrawal from the race, Biden expressed his full support for Vice President Harris Harris to win the Democratic nomination.
Since the debate with current President Biden, especially after the shooting incident at the rally, the calls for former President Trump to return to the White House have been increasing...Forecasts from overseas investment institutions have fluctuated significantly. Some people mentioned that Trump would not forget the companies that restricted his social accounts when he was about to leave office. Some analysts believed that he would cut government projects, which would be detrimental to new energy. Some institutions suggested that the more differentiated the capital market, the better the performance. etc.
We all still remember that when Trump was unexpectedly elected for the first time, the market thought it was the end of the world. Risk premiums soared and the stock market crashed. However, within a few hours, the market changed its mind and started a Trump bull market.
Fast forward eight years, if Trump is elected this time, although the surprise will be greatly reduced, it will be difficult for investors not to get on an emotional roller coaster. In the latest investment memorandum on July 17, Howard Marks was also inspired by an article about the election and focused on why predictions in the three industries of politics, economics, and capital markets often fail.
What these three industries have in common is that they are affected by psychological fluctuations, irrationality and randomness, so there is no certainty at all. Howard also made a point that he had never written about, a paradoxical connection between money and wisdom.
“When people get rich, others think it means they are smart; when investors become successful, people tend to think their intelligence can be applied to other industries, and even successful investors themselves It will feel like this.”
And he believes: "The success of investors may be the result of a series of lucky events or favorable conditions, rather than the result of any special talents. They may be smart or not, but for topics other than investing, successful investors often do not No more than most people know.”
It promises to be a long process before the November election. Maybe we should learn from Dr. John Templeton and deliberately delay reading the Wall Street Journal a few days later. Or maybe we should make adequate plans and act cautiously, while also silently repeating what Buffett said, "Not sure." Sex is the long-term value buyer’s friend”.
The Folly of Certainty
Howard Marks / Text
I usually get inspiration for my memos from a variety of sources, but this one was inspired by an article in the New York Times on Tuesday, July 9th.
What caught my attention at that time were a few words in the subtitle: "She had no doubts."
The speaker in the article is Ron Klain, Biden’s former chief of staff, and the topic of this article is whether President Biden should continue to run for re-election. The "she" in the subtitle refers to Biden's campaign team leader Jen O'Malley Dillon.
The article also quoted her words on June 27, a few days before the debate between Biden and former President Trump: "Biden will win, there is nothing else to say."
The point of my memo is not to discuss whether Biden will remain in the race or withdraw from the race, or whether he will win if he remains in the race, but that no one should be 100 percent sure of anything.
This will serve as another "short" memo from me, given the uncertainty surrounding Biden's candidacy.
This topic reminds me of a time when I heard a very senior professional express absolute certainty.
One recognized foreign affairs expert told us, "There is a 100 percent chance that the Israelis will 'take out' Iran's nuclear capabilities by the end of the year." He appears to be a truly informed source, and I have no reason to doubt his words.
I think it was 2015 or 2016, if in his defense he didn't say which year.
正如我在 2009 年 9 月的備忘錄《知識的幻覺》中所指出的，總體經濟預測者不可能正確地，將我們已知會影響未來的眾多變量以及我們知之甚少或一無所知的隨機影響因素全部納入其中。
That's why, as I've written in the past, investors and others affected by the vagaries of the general economic future should avoid words like will, won't, must, can't, always and never.
political industry
Thinking back to the 2016 presidential election, almost everyone was certain of two things:
Hillary Clinton will win;
If Trump wins by some fateful coincidence, the stock market will collapse.
Even the most uncertain pundits gave Clinton an 80 percent chance of winning, and other predictions rose from there.
Yet Trump won, and the stock market rose more than 30% over the next 14 months.
Most forecasters respond by tweaking their models and promising to do better next time.
My conclusion: If that’s not enough to convince you:
We don’t know what to expect;
We don't know how the market will react to what actually happens, so I don't know what else will convince you.
Back to the present, even before the much-watched presidential debate three weeks ago, no one I knew expressed too much confidence in the outcome of the upcoming election.
Ms. O'Malley Dillon, mentioned at the beginning of this article, may now soften her stance on Biden's victory, explaining that the debate results surprised her.
But that’s the problem! We don't know what to expect.
Randomness does exist!
When things go as expected, people say they knew what was going to happen. And when the development of things deviates from people's expectations, they will say that if no unexpected events occur, there will be no problem with the prediction.
However, in either case, there is a chance that surprises will occur, that is, predictions will go wrong.
The difference is that in the latter case, the accident happened; in the former case, the accident did not happen, but this does not deny the possibility of the accident.
Overall economic industry
In 2021, the Fed concluded that the inflation then occurring would prove to be "transient," defining it as temporary, non-entrenched inflation that has the potential to self-correct.
My point is, given enough time, the Fed may be proven right.
Inflation may subside on its own within three or four years if:
Pandemic relief funds that have led to a surge in consumer spending are running out;
Global supply chains are back to normal. (But there is another logic here. If the economic growth rate is not slowed down, it may trigger inflationary expectations and psychology in the next three to four years, which will require stronger actions).
However, because the Fed's view was not confirmed in 2021 and waiting any longer was untenable, the Fed was forced to launch one of the fastest rate hike plans in history, with far-reaching consequences .
The Federal Reserve's interest rate hikes in mid-2022 are almost certain to trigger a recession. It stands to reason that a significant increase in interest rates would have an impact on the economy.
History clearly tells everyone that a sharp tightening by the central bank often brings not a "soft landing" but more of an economic contraction.
The fact is, however, that the economy is not in recession.
Instead, by the end of 2022, the market consensus shifted to:
Inflation is easing, giving the Federal Reserve room to start cutting interest rates;
Cutting interest rates would keep the economy from recession or ensure that any contraction would be mild and short-lived.
This optimism ignited a stock market rally in late 2022 that has continued today.
However, expectations for a rate cut in 2023, which underpinned the market rebound, did not materialize. In December 2023, a "dot plot" representing the views of Fed officials showed that when three rate cuts were expected in 2024, the market's optimists directly doubled it, expecting six rate cuts.
We are already halfway through 2024, with inflation remaining high and not a single interest rate cut. The market consensus is that September will see the first rate cut, and stocks continue to hit new highs on this sentiment.
The current optimists might say, "We were right. Just look at the increase!" But when it comes to cutting interest rates, they are simply wrong.
To me, it's just another reminder that we don't know what's going to happen and how the market is going to react to what happens.
我最喜歡的經濟學家，Brean Capital 公司的 Conrad DeQuadros 為經濟學家這個話題提供了一個花絮：
I would use the Philadelphia Fed's Anxious Index (the chance of real GDP falling in the next quarter) as an indicator of the end of the recession.
A recession is over or close to being over when more than 50% of economists in a survey predict a fall in real GDP in the next quarter.
In other words, the only thing that can be said with certainty is that economists should not express any conclusions.
資本市場
Few people in October 2022 correctly predicted that the Fed would not cut interest rates in the next 20 months, and if that prediction took them out of the market, they missed out on 50% of the S&P 500's gains.
As for the interest rate cut optimists, their judgment on interest rates was completely wrong, but they are probably making a lot of money now.
So, that's it, market behavior is difficult to judge correctly. I am not going to spend time here listing the mistakes of the so-called experts in the market.
Instead, I want to focus on why so many market predictions fail.
Economies and companies may tend to behave predictably because their trajectories...should I say...reflect mechanisms at work.
In these industries, one might say, “If you start from A, you will get to B,” and that’s with some certainty. In other words, if the trend is unimpeded and the inference is valid, this prediction has a certain probability of being correct.
But markets are more volatile than the economy and companies. why is that? Because the psychology or emotions of market participants play an important role and there is unpredictability. To illustrate the extent of market volatility, let’s continue to quote data from economist Conrad:
40-year standard deviation of annual percent change
Source: weixin
Why do stock prices rise and fall so much more than the economies and companies behind them? Why is market behavior so unpredictable and often uncorrelated to economic events and company fundamentals?
The "science" of finance - economics and finance - assumes that every market participant is an economic person: that they make rational decisions to maximize their own economic interests. However, the critical role played by psychology and emotions often leads to this assumption being wrong.
Investor sentiment fluctuates wildly, overwhelming the short-term impact of fundamentals.
Because of this, there are relatively few market predictions that are proven correct, and even fewer predictions that are “right for the right reasons.”
引申
Today, experts and scholars are making various predictions about the upcoming presidential election. Many of their conclusions seem reasonable and even convincing.
Some people think that Biden should withdraw, and some think that he should not withdraw; some think that he will withdraw, and some think that he will not withdraw; some think that he can win if he continues to run, and some think that he will definitely lose.
Clearly, intelligence, education, data acquisition, and analytical skills are not enough to ensure correct predictions. Because many of these critics have these qualities, and obviously, they won't all be right.
I often quote the famous economist John Kenneth Galbraith. He said: "There are two kinds of forecasters: those who are ignorant and those who do not know their ignorance." I like this sentence very much.
Another quote comes from his book A Short History of Financial Euphoria. In describing the causes of "speculative mania and programmed crashes," he discussed two factors that "are rarely noticed in our time or in past times, one being the extreme short-lived nature of financial memory."
I have mentioned this many times in past memos.
But I don’t remember writing about his second factor, which Galbraith called “the specious connection between money and wisdom.”
When people become wealthy, others assume that this means they are smart; when investors become successful, people tend to assume that their intelligence can lead to similar success in other industries. In addition, successful investors tend to trust their own wisdom and express opinions on industries that have nothing to do with investing.
However, an investor's success may be the result of a series of lucky events or favorable conditions rather than the result of any special talent. They may or may not be smart, but successful investors tend not to know any more than most people about topics other than investing.
Despite this, many people do not hesitate to express their opinions, and these opinions are often highly regarded by the public. This is the specious part.
We find that some of them are now speaking out eloquently on issues related to the election.
We all know people who we describe as “often wrong but never in doubt.”
This reminds me of another of my favorite Mark Twain quotes (which may have some truth to it): "What you don't know won't get you into trouble, but what you know for sure won't."
As early as mid-2020, when various phenomena of the epidemic seemed to be under control, I slowed down the writing of memos, no longer writing one memo a week like in March and April.
I wrote two non-pandemic-related memos in May, titled “Uncertainty” and “Uncertainty II,” in which I discussed at considerable length the issue of cognitive humility. theme.
These two memos were one of my favorite topics, but they elicited little reaction. I quote a passage from "Uncertainty", hoping to give everyone a reason to go back and read them.
Here is part of the article that originally drew my attention to the topic of humility:
Li Ka-shing gave a sharing at Shantou University in 2017 called "Life with Willing Power". He said:
According to the authors' definition, epistemic humility is the opposite of arrogance or conceit. In layman's terms, it's similar to being open-minded. People who are intellectually humble can have strong beliefs but are also willing to admit they are wrong and be proven wrong on a variety of things (Alison Jones, Duke Today, March 17, 2017).
Simply put, humility means saying "I'm not sure," "The other person might be right," or even "I might be wrong." I think this is a must-have quality for investors; I definitely know that I like to associate with people who have this quality
You won't get into big trouble if you start your speech with statements like "I don't know, but..." or "I could be wrong, but...".
If we acknowledge that uncertainty exists, we conduct due diligence before investing, double-check our conclusions, and exercise caution. In good times, sub-optimization is performed, and stalls or crashes are less likely to occur.
Conversely, a person who is extremely determined may give up on the above behavior, and if something goes wrong, as Mark Twain suggested, the results can be catastrophic...
… As Voltaire concluded 250 years ago: Doubt is not a pleasant state, but certainty is absurd.
In short, in an industry affected by psychological fluctuations, irrationality and randomness, there is no certainty. Politics and economics are two such industries, and investment is also one. In these industries, no one can reliably predict the future, but many people overestimate their abilities and try to do so anyway.
Giving up certainty can keep you out of trouble. I highly recommend you do this.
Note
Last summer’s tennis Grand Slams provided the basis for my memo, “Fewer Losers, or More Winners?” 》 (Fewer Losers, or More Winners?) provides a source of inspiration. Likewise, last Saturday's Wimbledon women's final provided a footnote to this memo.
Barbora Krejcikova defeated Jasmine Paolini to win the women's tennis final.
Before the championship game, Krejcikova's odds were 125-1. In other words, bettors were certain she wouldn't win. These people may be right to doubt her potential, but it seems unlikely that they should be so sure of their predictions.
Speaking of unpredictable things, I can't help but mention the recent shooting incident at a Trump rally. This incident is likely to have more serious and influential consequences.
Even now that the incident is behind us and President Trump has escaped serious injury, no one can say for certain how it will affect the election (although it appears to have helped Trump's prospects so far) or the markets. .
So, if anything, it reinforces my bottom line principle: Forecasting is very much a loser's game.
[Disclaimer] There are risks in the market, so investment needs to be cautious. This article does not constitute investment advice, and users should consider whether any opinions, views or conclusions contained in this article are appropriate for their particular circumstances. Invest accordingly and do so at your own risk.
This article is reprinted with permission from: "Deep Wave TechFlow"
Original author: Smart Investor