In his latest memo titled – The Illusion of Knowledge, Howard Marks explains why macro-forecasting is not helpful, and why it’s ok to say “I Don’t Know!”. Here’s an excerpt from the memo:
“Confident” is the key word for describing members of this school. For the “I don’t know” school, on the other hand, the word – especially when dealing with the macrofuture – is “guarded.” Its adherents generally believe you can’t know the future; you don’t have to know the future; and the proper goal is to do the best possible job of investing in the absence of that knowledge.
As a member of the “I know” school, you get to opine on the future (and maybe have people take notes). You may be sought out for your opinions and considered a desirable dinner guest . . . especially when the stock market’s going up.
Join the “I don’t know” school and the results are more mixed. You’ll soon tire of saying “I don’t know” to friends and strangers alike. After a while, even relatives will stop asking where you think the market’s going. You’ll never get to enjoy that 1-in-1,000 moment when your forecast comes true and The Wall Street Journal runs your picture.
On the other hand, you’ll be spared all those times when forecasts miss the mark, as well as the losses that can result from investing based on over-rated knowledge of the future. But how do you think it feels to have prospective clients ask about your investment outlook and have to say, “I have no idea”?
For me, the bottom line on which school is best comes from the late Stanford behaviorist, Amos Tversky: “It’s frightening to think that you might not know something, but more frightening to think that, by and large, the world is run by people who have faith that they know exactly what’s going on.”
It’s certainly standard practice in the investment management business to come up with macro forecasts, share them on request, and bet clients’ money on them. It also seems conventional for money managers to trust in forecasts, especially their own. Not doing so would introduce enormous dissonance, as described above. But is their belief justified by the facts? I’m eager to hear what you think.
A few years ago, a highly respected sell-side economist with whom I became friendly during my early Citibank days called me with an important message: “You’ve changed my life,” he said. “I’ve stopped making forecasts. Instead, I just tell people what’s going on today and what I see as the possible implications for the future. Life is so much better.” Can I help you reach the same state of bliss?
You can read the entire memo here:
Howard Marks Memo – The Illusion of Knowledge
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