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What Comes Next?

April 19, 2020
Source: Patrick Carlise - Compass

"Everybody talks as if they know what's going to happen, and nobody knows what's going to happen." Charlie Munger, vice-chairman of Berkshire Hathaway, quoted in the April 18, 2020 edition of The Wall Street Journal.   

For what it's worth, and you may not agree, here are some thoughts from someone who is asked by the media to predict the future 5-10 times a week: 

  • I've never perceived any human talent for predicting the future despite the desperate desire to do so and the many methods employed over thousands of years. Many of the smartest people in the world - including Nobel-Prize-winning economists - get it utterly wrong, over and over and over again. I've never seen anyone be consistently right. I've never seen anyone even predict interest rate changes correctly. 
  • Nobody ever seems to remember their wrong predictions, and getting one prediction right (or semi-right) doesn't mean anything about a consistent ability to do so. 
  • The world and the markets are affected by thousands, maybe millions of local, national and international demographic, social, political and environmental issues - all constantly interacting with each other in impossible to figure out ways. When people confidently make predictions, they typically cherry-pick a single factor, statistic or expert quote: You can substantiate any opinion this way. Analysts, economists and other experts - all at prestigious institutions, with impressive pedigrees - often completely disagree with each other.
  • As often as not, the events that have sudden, major negative impacts on the market come out of nowhere, completely off the radar screen  - such as, to name a few examples, the coronavirus, fraudulently rated collateralized debt obligations, earthquakes, Savings & Loans junk-bond bankruptcies, and the Yom Kippur War/middle-east oil embargo. There have been instances where it could honestly be said that a certain thing had never happened or not happened in 100 years - with the implication that therefore it can't happen now - and then that thing happens. 
  • Past performance is no guarantee of future results: What happened in previous downturns and recoveries may or may not apply to today's circumstances, so don't be so certain they do.
  • Many, if not most, predictions are made by those who have vested financial, political or emotional interests - sometimes subconscious - in convincing people they're right. The more confident someone is in their prediction, the more likely they are to have a vested interest - and to be wrong, since bias skews any analysis.  (It is illegal in CA for a real estate agent to consciously give advice based upon their own financial interests.)  
  • The best economic forecasters have large amounts of humility, constantly question their calculations and tentative conclusions, try to adjust for personal bias, and cover any discussion of possible outcomes in caveats. If one does that, I believe one can honestly share one's thoughts with those who ask for it.
  • The best one can do is to provide data that is as straightforward as possible, and let people come to their own conclusions. However, no matter how much data is provided, it will be inadequate to the challenge of correctly predicting the future. So far, super computers have failed to do so reliably.
  • The desire to be positive and optimistic has no actual value in predicting the future, though it may have other psychological values. 
  • Those predictions most likely to get it somewhat right are usually the most general: "For hundreds of years, real estate and financial markets have moved in cycles, and presumably they will continue to do so. But I can't predict their timing, their specific causes or details, and the magnitudes of their ups and downs. Generally speaking, the most reliable strategy seems to be to buy a home for the longer term, one whose monthly cost is readily affordable for you, ideally using a long-term, fixed-rate loan (refinancing to lower rates when that option makes sense),while keeping an adequate financial reserve for emergencies. And then resisting the urge to use one’s home as a refinance-ATM to buy stuff during times of significant appreciation." Of course, that doesn't mean that short-term investing can't work out extremely well, or that a long-term investor/homeowner can't be badly affected by a sudden negative turn in the market and/or their own circumstances.

 "Everybody talks as if they know what's going to happen, and nobody knows what's going to happen." Charlie Munger, vice-chairman of Berkshire Hathaway, quoted in the April 18, 2020 edition of The Wall Street Journal.

You don't have to pretend to know what is going to happen, no matter how many times you're asked. Charlie Munger doesn't bother to pretend.