- The premise: "how can anyone be without doubt."
- Macro-forecasting is impossible: (a) we don't know what's going to happen and (b) we don't know how the markets will react to what actually does happen
- The economist consensus has been wrong about the path of rate cuts and about the odds of a recession.
- He remarks about how some people have ended up capturing massive gains in the stock market based on a belief the Fed would be cutting rates. Clearly the Fed didn't cut but stocks rose nonetheless. In other words, they ended up right for the wrong reasons.
- "Markets swing more than economies and companies. Why? Because of the unpredictability of market participants' psyches or emotions."
- "Intelligence, education, access to data and analysis can't be sufficeint to produce correct forecasts.". Quoting John Kenneth Galbraith, "There are two kinds of forecasters: those who don't know, and those who don't know they don't know."
- People underestimate the role of luck in making money. There is a specious association of money and intelligence.
- Have intellectual humility - realize you might not be sure, or you don't know
- Certainty in fields like politics, economics and investing is absurd.
Uncertainty is an interesting word and one that is often conflated with "risk" in the financial setting and perhaps is a little confusing. I've found the following to be a helpful guide: "risk refers to all outcomes that can be insured against, uncertainty to those which cannot." And "..uncertainty as both Keynes and Knight define it, but which the mainstream denies: a situation where we have no scientific basis for calculating a ratio (probability)." To further illustrate: "For example, if one smoker out of ten died of lung cancer, the probability of smokers dying of lung cancer is 10 percent. This set of numerical probabilities [cardinal probabilities] is the standard domain of risk as recognized by actuaries...At the opposite extreme is uncertainty...where we have no scientific basis for calculating a ratio." Keynes (as reported by Skidelsky) sums this up as "The magnitudes of some pairs of probabilities we shall be able to compare numerically [cardinal probabilities], others in respect of more or less only (i.e. 'more or less likely', "ordinal probabilities), and others not at all [uncertainty]." If you're ever interested in reading more about risk and uncertainty (and Keynes views on uncertainty), author Peter Bernstein's classic "Against The Gods" is worth a read.
While uncertainty might be scary, Bernstein laments: "A tremendous idea lies buried in the notion that we simply do not know. Rather than frightening us, Keyne's words bring great news: we are not prisoners of an inevitable future. Uncertainty makes us free."
Or as Frank Herbert said in the Dune series: “to know the future absolutely! All of it! What fortunes could be made — and lost on such absolute knowledge, eh?” but “what a hellish gift that’d be. What utter boredom! Every living instant he’d be replaying what he knew absolutely … Ignorance has its advantages.”
Given the uncertainty and the bombardment of noise in the current economic environment, I was reminded of two quotes in the famous wall street book "Where Are the Customers' Yachts?" by Fred Schwed: "In this case, the notion that the financial future is not predictable is just too unpleasant to be given any room at all in the Wall Streeter's consciousness" and "For one thing, customers have an unfortunate habit of asking about the financial future. Now if you do someone the signal honor of asking him a difficult question, you may be assured that you will get a detailed answer. Rarely will it be the most difficult of all answers-"I don't know".
A prudent way to navigate the inherent uncertainty in the world and economy is by maintaining some flexibility, a buffer, a margin of safety and a level of creativity in planning. This flexibility isn't free, it's the extra turn of leverage not taken, it's the liquidity not deployed, or other analogous things, but it also provides a valuable option to change course when things aren't working out. It creates a condition to increase the odds of survival and survival is what allows individuals and businesses to adhere to Charlie Munger's first rule of compounding: "The first rule of compounding is to never interrupt it unnecessarily".
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