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Josh Brown: In 2015 I Learned That…MFO's David Snowball Comments
FYI: Wait – 2015 is already over? How the hell did that happen?
It’s been quite a year, even though it feels like it flew by in an instant. Let’s hurry up and preserve the lessons learned lest we forget them all as 2016 gets underway.
Nice metaphor extension from a fellow named Mark Yusko of Morgan Creek Capital Management: "Trying to catch falling knives always results in lost fingers… Better to let the knife hit the floor, bounce around a little, and when it stops moving, go pick it up."
I wonder if David's planning to flesh out his comment about this being a senseless market.
Maybe we are headed for a great deflationary collapse - which raw materials prices appear to suggest. Or maybe the year was more a lesson in trend persistency. Not much other than tech and (possibly) health care seems to have prospered. Even my ultra-conservative "safe" funds like RPSIX, DODIX and TRRIX all took hits. Looking at TRP, their Ginny Mae made a little $$, despite rising rates, and their HY fund fell - but hardly the rout one would surmise from the media hype.
If anybody can explain why this was a sensible market I'd love to hear.
If anyone can DEFINE what a sensible (or senseless) market is in a sensible way, I would love to hear it. Predictable? Amenable to simple explanations? Always goes up? Follows some simple metrics or thumb rules? Behaves as I expect it to? Then only does it make sense to opine if it was a sensible market or not.
Perhaps we can have our own "In 2015 I learned that..." list here. Serious or silly just to entertain.
To start, here is what I learnt in 2015...
Not only are most predictions wrong but most explanations of why something happened in the markets are also wrong (or non-falsifiable).
Thanks Ted...a nice start to the new year...and little5bee with that go blue nonsense is probably happy as well as that team up north destroyed Florida.
Prolific Melody Beattie wrote: “The new year stands before us like a chapter in a book, waiting to be written. We can help write that story by setting goals”.
In the investing world we can certainly set those goals, but we are powerless with regard to controlling the final outcomes. I have been investing for over 6 decades and I still do not find any consistent rhyme or any repeatable reasons why the marketplace does what it does.
An excellent visual summary of the non-predictability of both the equity and the fixed income segments is available in the market’s periodic returns tables that are often referenced in these MFO exchanges. Here is a Link to an American Century version of these illustrative tables:
There is no rhyme, no reason to the steep yearly reversals in these category returns. Economies don’t change that rapidly; only investor sentiments are that volatile. If you can ferret some respectable pattern from these chaotic data, than” you’re a better man than I am Gunga Din” !
Sensible market actions are mostly an illusion. Our market experts are still trying to explain the Great Depression and coupled market meltdown. Some folks place blame on the Smott-Hawley tariff tax bill; others take exception. However, we’re all very inventive at generating seemingly plausible, but mostly wrong, causes.
Some folks believe that we were just due for a market correction after a rather long run of positive outcomes. That’s a fallacy; it is more superstition than factually based. Just because a coin toss has come up heads ten times in succession doesn’t alter the base rate odds that the next toss has a 50/50 chance of yet another head.
Historically, equities have returned positive results about 70% of the time annually. Although that didn’t happen this year, I expected that outcome and am disappointed. Next year, I expect that the positive return odds remain at the 70% likelihood.
I don’t change my portfolio construction based on forecasters. In 1933 Alfred Cowles published a paper with a questioning title, “Can Stock Market Forecasters Forecast?”. He answered in the negative. Not much has changed in the intervening decades. In that spirit, I agree with the comments submitted by MFOer vkt.
My contribution to a lessons learned list would not be new for 2015, but it surely would be persistent: Forecasters can’t forecast.
Best Wishes for a healthy and profitable New Year.
As noted above, the writer states: "In the investing world we can certainly set those goals, but we are powerless with regard to controlling the final outcomes. I have been investing for over 6 decades and I still do not find any consistent rhyme or any repeatable reasons why the marketplace does what it does."
Based upon the boldface words, I may as well forget everything I've read here and otherwise; and leave this game.....
I think MJG provided the most sensible and comprehensive answer. And I'm reminded of a line from Dickens:
"(I regret) having supposed that there was sense where there is no sense and a laudable ambition where there is not a laudable ambition ... You cannot control the mincing vanities and giddinesses of empty-headed girls; you must not expect to do it, or you will always be disappointed."
Josh wrote me (and presumably everyone else on the list) on December 30th, and asked us to complete the sentence, "In 2015, I learned that ..." Seized by uncontrollable whimsy, I sent him a rather longer answer than was publishable.
Hi, Josh.
In 2015 I learned that ...
... in the battle between a sensible strategy and a senseless market, the market wins (for now).
Other things we learned that probably wouldn't fit in your column: Sometimes when they say dry-clean only they really mean it. Who knew? The longest 3 seconds in sports is when your kid is circling under a fly ball. When they describe a ghost pepper as insanely hot, they're telling the truth. And, that I can't see Trump without thinking Mussolini (Duce! Duce! Duce!).
In 2016, I'm hoping to learn whether what they say about Irish milk chocolate is true.
I really do believe that forecasting (especially the future according to Yogi Berra) is a terribly uphill slough. But if some error rate is acceptable, it is not an impossible assignment. As Yogi famously said: “When you come to a fork in the road, take it”. And when investing, there are countless uncertain forks in the road.
Study after study have demonstrated the high error rates when making forecasts. The long running CXO Advisory Group study that scored the forecasts of 68 financial professionals just reinforced the high hurdle that most experts stumble against. The CXO guru grades registered only about a 48% accuracy record.
Random successes are often followed by painful failures as the regression-to-the-mean iron law exercises its ultimate influence.
On a much larger scale, Phil Tetlock has organized and measures the accuracy of a large body of carefully selected, screened, and challenged political wiz-kids. These scholarly studies have been conducted over many years and across many iterations. Expert teams have been assembled based on earlier prediction prowess. Forecasting accuracy at the margins has been improved with team effort, but it remains a tough uphill battle. Here is a Link to a relatively recent Tetlock lecture:
Experts can be assembled that tilt the forecasting odds just a little. An informed team of bright folks can make a difference, especially if the team is dedicated and is composed of members with a wide ranging set of experiences and knowledge. The MFO contributors satisfy those criteria.
So, while I surely do not agree with all that is said on this wonderful site, I do learn and profit from the MFO exchanges. After 6 decades of moderately successful investing, I’m not prepared to “leave this game”.
An important lesson that I learned during those many participating years is that setting a satisficing goal is better than shooting for a maximizing goal in terms of anticipated rewards. If you are not familiar with the concept, here is a dictionary definition of 'Satisficing': “A decision-making strategy that aims for a satisfactory or adequate result, rather than the optimal solution”. An optimal portfolio return is a mythical target.
Additionally, I preach and practice portfolio diversification and patience as strong investment tools to embrace. Investing need not be complex.
Stay strong and healthy for 2016. The market challenges are forever present.
Comments
I wonder if David's planning to flesh out his comment about this being a senseless market.
Maybe we are headed for a great deflationary collapse - which raw materials prices appear to suggest. Or maybe the year was more a lesson in trend persistency. Not much other than tech and (possibly) health care seems to have prospered. Even my ultra-conservative "safe" funds like RPSIX, DODIX and TRRIX all took hits. Looking at TRP, their Ginny Mae made a little $$, despite rising rates, and their HY fund fell - but hardly the rout one would surmise from the media hype.
If anybody can explain why this was a sensible market I'd love to hear.
Perhaps we can have our own "In 2015 I learned that..." list here. Serious or silly just to entertain.
To start, here is what I learnt in 2015...
Not only are most predictions wrong but most explanations of why something happened in the markets are also wrong (or non-falsifiable).
That's some interesting and diverse company you're lumped in with Professor. Just another reason I like Josh Brown.
Happy New Year,
Ted
Happy New Year to you as well Ted.
Prolific Melody Beattie wrote: “The new year stands before us like a chapter in a book, waiting to be written. We can help write that story by setting goals”.
In the investing world we can certainly set those goals, but we are powerless with regard to controlling the final outcomes. I have been investing for over 6 decades and I still do not find any consistent rhyme or any repeatable reasons why the marketplace does what it does.
An excellent visual summary of the non-predictability of both the equity and the fixed income segments is available in the market’s periodic returns tables that are often referenced in these MFO exchanges. Here is a Link to an American Century version of these illustrative tables:
https://www.americancentury.com/content/dam/americancentury/ipro/pdfs/flyer/Periodic_Table.pdf
There is no rhyme, no reason to the steep yearly reversals in these category returns. Economies don’t change that rapidly; only investor sentiments are that volatile. If you can ferret some respectable pattern from these chaotic data, than” you’re a better man than I am Gunga Din” !
Sensible market actions are mostly an illusion. Our market experts are still trying to explain the Great Depression and coupled market meltdown. Some folks place blame on the Smott-Hawley tariff tax bill; others take exception. However, we’re all very inventive at generating seemingly plausible, but mostly wrong, causes.
Some folks believe that we were just due for a market correction after a rather long run of positive outcomes. That’s a fallacy; it is more superstition than factually based. Just because a coin toss has come up heads ten times in succession doesn’t alter the base rate odds that the next toss has a 50/50 chance of yet another head.
Historically, equities have returned positive results about 70% of the time annually. Although that didn’t happen this year, I expected that outcome and am disappointed. Next year, I expect that the positive return odds remain at the 70% likelihood.
I don’t change my portfolio construction based on forecasters. In 1933 Alfred Cowles published a paper with a questioning title, “Can Stock Market Forecasters Forecast?”. He answered in the negative. Not much has changed in the intervening decades. In that spirit, I agree with the comments submitted by MFOer vkt.
My contribution to a lessons learned list would not be new for 2015, but it surely would be persistent: Forecasters can’t forecast.
Best Wishes for a healthy and profitable New Year.
Based upon the boldface words, I may as well forget everything I've read here and otherwise; and leave this game.....
再见
And I'm reminded of a line from Dickens:
"(I regret) having supposed that there was sense where there is no sense and a laudable ambition where there is not a laudable ambition ... You cannot control the mincing vanities and giddinesses of empty-headed girls; you must not expect to do it, or you will always be disappointed."
(Mr. Stryver - A Tale of Two Cities)
Thank you for reading and responding to my post.
I really do believe that forecasting (especially the future according to Yogi Berra) is a terribly uphill slough. But if some error rate is acceptable, it is not an impossible assignment. As Yogi famously said: “When you come to a fork in the road, take it”. And when investing, there are countless uncertain forks in the road.
Study after study have demonstrated the high error rates when making forecasts. The long running CXO Advisory Group study that scored the forecasts of 68 financial professionals just reinforced the high hurdle that most experts stumble against. The CXO guru grades registered only about a 48% accuracy record.
Random successes are often followed by painful failures as the regression-to-the-mean iron law exercises its ultimate influence.
On a much larger scale, Phil Tetlock has organized and measures the accuracy of a large body of carefully selected, screened, and challenged political wiz-kids. These scholarly studies have been conducted over many years and across many iterations. Expert teams have been assembled based on earlier prediction prowess. Forecasting accuracy at the margins has been improved with team effort, but it remains a tough uphill battle. Here is a Link to a relatively recent Tetlock lecture:
https://www.aei.org/events/predicting-the-future-a-lecture-by-philip-tetlock/
Experts can be assembled that tilt the forecasting odds just a little. An informed team of bright folks can make a difference, especially if the team is dedicated and is composed of members with a wide ranging set of experiences and knowledge. The MFO contributors satisfy those criteria.
So, while I surely do not agree with all that is said on this wonderful site, I do learn and profit from the MFO exchanges. After 6 decades of moderately successful investing, I’m not prepared to “leave this game”.
An important lesson that I learned during those many participating years is that setting a satisficing goal is better than shooting for a maximizing goal in terms of anticipated rewards. If you are not familiar with the concept, here is a dictionary definition of 'Satisficing': “A decision-making strategy that aims for a satisfactory or adequate result, rather than the optimal solution”. An optimal portfolio return is a mythical target.
Additionally, I preach and practice portfolio diversification and patience as strong investment tools to embrace. Investing need not be complex.
Stay strong and healthy for 2016. The market challenges are forever present.
Best Wishes.