The Market moved very little in Q2 2015. For update see http://www.bloomberg.com/markets
These “uncertain times”. This expression is utilized constantly to express the complexity of our world and the opaque and unknowable future. It is interesting to stop and think about what times were more certain. Looking back at different historical events that were daunting, it is quite deceptive in hindsight to think that outcomes were foreseeable or predictable.
The range of outcomes after WWI, WW2, the JFK assassination, Korea, Vietnam, Nixon resignation and many more modern events created vast uncertainty. It is only in hindsight that the pieces fit together. It is iconic hindsight bias (the tendency people have to view events as more predictable than they were in real time, after an event, people often believe that they knew the outcome before it was revealed) that perpetuates the notion that we are living in “uncertainty”. Now is the time we live in. The present is no more or less predictable than any other time. 2015 is no more or less stable or unstable than any other year. Next time you hear the expression about how baffling things currently seem, think about history and have a good laugh.
Prognostications of doom have a long history of garnering outsized attention and awareness in today’s hyper paced media sphere. When the end of the world fails to arrive, there is often a quiet revision of the prediction as the oracle, seer or fortune teller slips out the back door to re-tool a new message to sell. For those that actually predict future events, there is often recognition and reward along with a podium for the anointed seer to continue to make further proclamations.
It can be difficult to ignore those that have made accurate predictions as they move forward with new visions and prescriptions for where the future lies. A powerful dynamic of this challenge is that we cannot take into account all of the people and their predictions that DID NOT occur. The sheer number of pundits producing hot air on a daily basis will generate a few correct views by virtue of the size of the group making the prediction. All of the fools and their mistaken views wash away as we anoint the new celebrity of great vision who was able to see what everyone else missed.
These darlings of collective attention circulate in all the activities of our lives. The post-genius moment is almost always a letdown. Brilliant movie producers that go on to flop after flop; genius baseball managers that fade to mediocrity under the weight of variance and lackluster player rosters; creative car designers that can never seem to craft another slice of excitement; one hit wonders that create such compelling music, never to be heard from again. The list of famous flameouts is very long and continuously expanding.
In the financial world, fear has always been the biggest seller. There is an ever-growing list of articulate, highly credentialed operators that populate the info stream with a wide spectrum of predictions on everything from the collapse of the US Dollar to the next Iphone feature. It is often the dire commentaries that gather the most attention.
The blockade to the pundit that has had success is that the eco, social, enviro, political dynamics of our world grow evermore complex on a daily basis. How can the calculation of these complex factors ever be even roughly calculated? Can we have a formula that would include (population growth) / (energy production) / (political cycle) / (innovation)? The business of prediction is in some sense like a lottery drawing. Sometimes one or two people will construct a vision or formula that gets what is about to happen exactly correct. Pundits rarely repeat the sheer luck and circumstance that came together to make their prediction accurate. There are numerous real world examples that seem to suggest what you may expect…that the accurate future prediction was a one off moment that does not repeat.
When the curtain is pulled back, the big media personalities and pundits are often revealed to be as fallible as everyone else, we often find much less than the hype would seem to justify. One recent revelation that deserves investor attention is the story of Meredith Whitney.
http://www.bloomberg.com/news/articles/2015-01-12/how-meredith-whitney-s-american-revival-sputtered-in-debut-year
Meredith was a significant character in the massive selling book by Michael Lewis, “The Big Short”. Following that influential docudrama, Mrs. Whitney was featured in a frightening 60 Minutes piece titled “State Budgets: The Day of Reckoning”. http://www.cbsnews.com/news/state-budgets-the-day-of-reckoning/
Mrs. Whitney followed up this breakout with a book titled Fate of the States: The New Geography of American Prosperity. The hardcover version of the 2013 book is widely available for $.01 + $3.99 shipping from numerous used book outlets.
Meredith Whitney was an analyst. She emerged during the run-up to the financial crisis of 2008 as a voice that constructed a pessimistic view of Citigroup in late 2007 along with a strongly bearish analysis of US banks prior to the turmoil and consequences of the financial crisis that put her on a pedestal. She was crowned as one who clearly saw trouble coming.
Let us note that analysts are paid to have opinions and that there is a veritable ocean of babble produced on a daily basis regarding every manner of economic activity that exists. These analysts do not manage money, but they do the research that creates ideas for those that actually manage money.
The classic scenario for Meredith was that as her fame ascended, pressure built for her to craft additional and ongoing insights as to where the next flash of trouble was going to come from. When 60 Minutes came calling she had her next vision ready. She was the perfect 60 Minutes interview star in her articulate intonation and striking beauty, along with the credential of recent visionary success.
The problem was that complexity got in the way. I am sure her theory that suggested a wave of municipal bankruptcies and defaults had a lot of elegant math and fundamental research behind it. It was bold and scary to suggest that something that has never come close to happening in modern municipal bond markets. So far, this prediction has not been accurate.
The platform of 60 Minutes is very powerful. There is unlikely to be any follow-up of humility and “where is she now” story. The current state of the story is as you would expect. Meredith parlayed her media success into an effort to manage money in her own hedge fund. The fund did poorly, got into litigation and has been dissolved.
It is striking to see real examples of how the elevation of people beyond what is warranted can create humiliating outcomes. This holds a powerful investment lesson. Viewpoints that can be seen as compelling and very well-reasoned statements from pundits that have seemingly earned their credential need to be held with a strong and skeptical view. Investors are often drawn to the offering of a certain and confident path. The allure of a visionary that can be followed with high confidence is something that we all crave. Our rational brain has the knowledge deep down that there is no way to know the future.
The investment world is filled with opinions and clever talk about ways that money can be managed. The crucible of actually trading and investing burns away all the talk. What you have left is pure. It is only the results and there is no way to spin or make rationalizations as to why it did not work. Real quality management is not revealed suddenly, but it is honed over long periods of trial and error. Humility and refinement in light of miscalculation are critical to the process of quality long term management and investment philosophy. This is almost always a process that is not revealed by confident proclamations on television via shows like 60 minutes. If there were real valuable knowledge, the owner of that material would most likely quietly implement investment strategies for profitable results, not broadcast the material and publish books about it.
The aftermath of the financial crisis is still strongly affecting our investment world in many ways. The search for shelter from the next storm is a distraction from the process of long term investing. We must remain patient and confident that there is no easy road that any guru or financial idea can lead us through. There is only the grinding process of holding high quality, broadly diversified equity portfolios. With persistent patience through the inevitable ups and downs, long term investors can build wealth that will provide the strength and security that we seek.