“If something is impossible to know you are better off not being very smart, because smart people fool themselves into thinking they know while average people are more likely to say, “I don’t know” and end up closer to reality.”Morgan Housel
Sitting by a fire, on a nice big, soft, well-worn couch, catching up with my thoughts over the past holiday week, I read the above quote by Morgan Housel. My mind perked up and snapped to attention. I had to read it twice to make sure I understood what exactly he was saying. He’s a very bright guy, and when he writes something, it’s usually reflective and commands attention.
At this time of year, everyone is making projections, and we are led to believe that ‘smart’ people can make accurate projections about financial markets as well. So, when someone like Housel says that listening to ‘smart’ people is probably no better than listening to a series of guesses, it’s worth taking into consideration.
If we are honest with ourselves, no one definitively knows the answers when it comes to our politics or our economy. This last year is evidence enough that projections are just that, and that outcomes can be radically different from anyone’s wildest guess. A person or group may get some of it right, but most will adapt and change their minds as things evolve. In the end, no matter how much we try to predict the future, it will be a random outcome and if someone gets it right, it’s likely just by chance. There are billions of us, and if anything can be learned from this mess which we are all living through, it’s that we are all connected more than we may have thought. Covid-19 started in a market in Wuhan with one person—further showing us that the flap of butterfly wings really can start a windstorm.
It doesn’t matter the algorithm or the speed of your computer, most of what will happen next year is unknowable and unpredictable. That doesn’t mean we should just shrug our shoulders. There are things, both positive and negative, that will impact us as individuals, and some that will impact us as a collective group (both locally and internationally). As your advisor, it is our responsibility to consider the various risks that we do know of, to try our best to anticipate the others, and mitigate the affects these risks (and the ones that are a surprise to everyone) have on your respective portfolios. That is our job, and we do it continuously.
The problem is, often, it’s the risk that no one foresees that upsets the applecart. Again, last year was irrefutable proof of that. If we accept Housel’s provocative statement, it’s best to try and consider the unknowable unknowns and their commensurate risks and consider actions in a manner that leaves one exposed to upside surprises but also considers the downsides as well.
We all remember how we felt last March, and while everyone is relieved that currently the future looks reasonably favourable, and your portfolios are substantially higher now, it is always wise to consider how comfortable you would feel if markets unexpectedly tumbled 20%. This is a particularly important consideration to make when everyone is happy, and the experts are calling for more good times.
To properly frame the question, it’s important to remember that market timing is unquestionably hard to do while long-term investing is unquestionably rewarding (if invested in the right businesses). However, regardless of the investing method, when things fall, we feel unquestioningly bad in the moment. Having accepted that it’s the things we cannot know that will surprise us and impact our portfolios, and that we cannot know if those things will be good or bad in the short to medium-term—do you feel comfortable with the amount of risk we have in your portfolio?
Markets will invariably take a tumble, from what level, when, and for what reason, we cannot not know. We have great confidence in the resiliency of the businesses you own for the long-term. Nonetheless, it’s best to accept that there will be a period when prices of stocks reflect more uncertainty than the present bullish forecasts of the experts.
Your portfolios are well balanced, and we have confidence in the long-term future of the businesses you own. Nonetheless, should you have a sense that things may not be right for your situation, we encourage you to reach out to us. As Housel correctly points out, you are the best informed about your own risk profile and we at Davis Rea care very much about how you feel.
We hope you welcomed the arrival of 2021 safely, and we wish you and your families health, happiness, and prosperity in the upcoming year!