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October 12 - October 18, 2020
Economic history can be summed up as the story of impeccably bad forecasting. Busts start when the future looks the brightest, and booms are born when the end looks near, but you never know when those stages hit until they're behind you.
Famed author Malcolm Gladwell put it best: "Good writing does not succeed or fail on the strength of its ability to persuade. It succeeds or fails on the strength of its ability to engage you, to make you think, to give you a glimpse into someone else's head -- even if in the end you conclude that someone else's head is not a place you'd really like to be."
"To make money they didn't have and didn't need, they risked what they did have and did need. And that's foolish. It is just plain foolish. If you risk something that is important to you for something that is unimportant to you, it just does not make any sense."
What really gives people meaning and happiness is a combination of four things: Control over what they're doing, progress in what they're pursuing, being connected with others, and being part of something they enjoy that's bigger than themselves.
Tetlock eventually collected a database of more than 25,000 expert predictions, which he used to write what has become the bible of predictive science, the book Expert Political Judgment. The book draws one big conclusion: Most expert predictions are the equivalent of random guesses.
The main distinction is that those who make the best predictions have a collection of little ideas and are always incorporating new information into their outlooks, while those making the worst predictions have one grand theory that they trumpet through thick and thin. Tetlock calls the former foxes, the latter, hedgehogs.
Foxes -- a rare, peculiar bunch -- share several other traits. One is that they can change their mind with ease.
"What looks like tomorrow's problem is rarely the real problem when tomorrow rolls around." In other words, the world is fundamentally unpredictable. Things happen that no one could have seen coming. If you can't accept that when things change your opinions might need to change, too, you will be left anchored to a reality that no longer exists -- and likely making terrible predictions.
Cutting your losses, learning from mistakes, and preparing for the next pitch rather than swinging wildly at balls that fly over head is how you get your batting average up. As the old saying goes, "It's far better to be mostly right than precisely wrong."
Foxes are also unique in that they're skeptical of themselves.
He's quick to point out where things stand historically, but he rarely attaches those views to a prediction of what might happen next -- the kind of predictions those with poor track records give out like candy.
"Those who claim to foresee the future are lying, even if by chance they are later proved right."
Those who ultimately make the best predictions aren't smarter than everyone else. They're just more humble, only making broad predictions if and when the stars align, updating their views or changing their minds frequently, and having a mindset that makes them totally comfortable with being wrong.
It's not the experts, but the people who listen to the experts, who are the real fools.
"Beware of the person who can't be bothered by details.” -- William Feather
Danger is when something can be stated as fact, without facts backing it up, and still be accepted by most.
Income is an oddity in that many of those statistically near the top still feel inadequate.
When someone offers you money, take it. And when the law allows you to walk away from a debt, do it. That's rational behavior.
The cure for high prices is higher prices, as the saying goes.
Forecasters took recent trends, drew a straight line into the future, and declared victory. The 2001 forecast essentially predicted a decade of no recessions, no wars, and no political myopia -- this in a country whose history is littered with all three.
German professor Gerd Gigerenzer estimates that the increase in automobile travel in the year after 9/11 resulted in 1,595 more traffic fatalities than would have otherwise occurred. In other words, more than half as many people died attempting to avoid another 9/11 than died in the actual attack. Add in the impact that stress had on our health, and the reaction to 9/11 may have been more deadly than the attack itself. "People jump from the frying pan into the fire," Gigerenzer said.
There's an important lesson about risk in there that can apply to other sides of your life, including investing. Like those reacting to the fear of another terrorist attack, investors seeking to avoid perceived risk often put themselves in greater actual risk.
"History doesn't crawl; it leaps."
The events that will have the greatest impact on the next 30 years simply cannot be predicted today, will hit quickly, and will come out of nowhere. Sept. 11 reinforced that point. History doesn't crawl; it leaps.
History is "one damned thing after another," said historian Arnold Toynbee.
Where people fall into trouble is getting stuck in the mind-set that these crises are one-in-a-million events. The perfect storm. The thousand-year flood. In reality, they're just the normal, common path of history. Sure, no one knows exactly what's coming, but something is always coming.
One, realizing that crises happen every year highlights the need to use debt sparingly, have an emergency fund, keep your resume updated, hug your loved ones, all that stuff. Give yourself room for error. There's the old saying, "No one ever dies wishing they saved more money." Maybe true, but plenty live wishing they had.
There are only a few ironclad rules of investing. One is that there's a negative correlation between sentiment and future returns.
One of the most powerful forces in behavioral finance is called recency bias. It states that when we try to predict the future, we tend to just extrapolate the recent past. If an asset did well in recent years, our expectations of future returns jump. If it crashed in recent years, we give up on its future.
Having attended a few of these conferences, and crashed a few hedge fund meetings, I think Wiesenthal's spot-on. The value of the meetings doesn't lie in the pitches, but in learning what kind of people successful investors are. How do they work? What do they read? Where do they get their ideas?
People usually screw up because either they don't know what they're doing, or what they're doing is so complex that they become forgetful. The airline industry has nearly eliminated the latter with a simple tool: checklists.
Black Swan author Nassim Nicholas Taleb put it best: "The calamity of the information age is that the toxicity of data increases much faster than its benefits."
Google's IPO prospectus has a great quote: "A management team distracted by a series of short term targets is as pointless as a dieter stepping on a scale every half hour."
But as my colleague Alex Dumortier recently wrote, "The expected return isn't the return you should expect." This isn't as crazy as it sounds. Over very long periods of time, stocks will earn respectable returns of 7% to 9% a year. But among individual years -- even decades -- those returns will be all over the map.
Warren Buffett once said that unless you can watch your stocks fall 50% without becoming panic-stricken, you shouldn't be investing.
All of this drives home a tenet of investing and my beef with Bove's advice: You cannot time the market. Repeat that. Say it again. Tattoo it on your chest. This has always been true -- the world simply isn't predictable -- but it's more true today with the advent of high-speed computer trading and a proliferation of hedge funds. Try timing the market, and they will beat you every time.
"The first rule is that you've got to have multiple mental models. If you just have one or two that you're using, the nature of human psychology is such that you'll torture reality so that it fits your models. It's like the old saying, 'To the man with only a hammer, every problem looks like a nail.' That's a perfectly disastrous way to think and a perfectly disastrous way to operate in the world. You've got to have multiple models.” --Charlie Munger
"The world has plenty of better artists, smarter writers, funnier humorists and more experienced business people. The rare part is that each of those modest skills is collected in one person. That's how value is created." --Dilbert creator Scott Adams
"A true bubble is when something is overvalued and intensely believed."
"The fastest way to become rich is to socialize with the poor; the fastest way to become poor is to socialize with the rich." --Nassim Taleb
"The wisdom of crowds only really applies when forecasts are genuinely independent, as when farmers are guessing the weight of a bull at a country fair. Once you know what others are thinking, their views lead you into error." --The Economist
"We learn less from history than we think we do, and this misperception skews our perception of the future." --Duncan Watts
"Going from an income of a dollar a day to $150,000 a year is about the same distance as going from $150,000 a year to the type of income that might get you on the Forbes list of richest Americans." --Charles Kenny
"By the age of 3, children from wealthier households hear, on average, about 500,000 encouragements and 80,000 discouragements. The ratio is reversed in households on welfare." --Jonah Lehrer
"The opposite of success isn't failure; it is name-dropping." --Nassim Taleb
"The only function of economic forecasting is to make astrology look respectable." --John Kenneth Galbraith
"Paying Kim Kardashian $10,000 to tweet about a product may well buy less buzz than paying 10,000 ordinary Twitter users $1 each." --Chris Chabris
"If you manage a team of 10 people, it's quite possible to do so with very few mistakes or bad behaviors. If you manage an organization of 1,000 people it is quite impossible. At a certain size, your company will do things that are so bad that you never imagined that you'd be associated with that kind of incompetence." --Ben Horowitz
"Don't believe that 'customer is always right' stuff. ... ING Direct has built the fastest-growing bank in America by saying no. When customers ask for a credit card, the answer is no. When they ask for an online brokerage, the answer is no. When they ask if they can open an account with a million dollars, the answer is no." --Jason Fried
"The man who doesn't read good books has no advantage over the man who can't read them." --Mark Twain
