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Memos from Howard Marks: Expert Opinion

Expert Opinion, January 10, 2017

“No amount of sophistication is going to allay the fact that all of your knowledge is about the past and all your decisions are about the future” – Ian Wilson (former GE Executive)

  • Opinions of experts concerning the future are accorded great weight, but they’re still just opinions; they may be right more often than the rest but they’re unlikely to be right all the time

The Year Polls Stopped Working

  • Pollsters considered UK citizens 70% likely to vote to remain; “Leave” won by a few percent
  • Nate Silver, of website FiveThirtyEight, correctly predicted the outcome in all 50 states once and 49 the other time in the 08 and 12 presidential elections
    • In 2016, FiveThirtyEight never had Hillary as an underdog and on election day, estimated that she was 71.4% likely to win – most other pollsters put her chances of winning at between 80 and 99%
  • The reform referendum that Italy’s Prime Minister Renzi bet his career on – which had been considered 3% behind – lost by 20%
  • Clearly there was a groundswell of populist, anti-establishment, and anti-insider sentiment, but shouldn’t it have been detected?
    • For some reason, pollsters either failed to talk to a representative sample, failed to elicit honest responses, or failed to accurately interpret data

So Much for the Experts

  • Just before election, what did we know?
    • Polls were almost unanimous in saying Clinton would win
    • Near-universal belief that a Trump victory would be bad for the markets
  • So what happened? Clinton didn’t win and US stock market had its best week since 2014
    • No one really knows what events are going to transpire
    • No one knows what the market’s reaction to those events will be

Media

  • Many outlets are highly biased to one side and make it possible to read, watch and listen all day and never be exposed to all aspects of the issues
  • Often remind me of the description of economists I heard in the 70s: “portfolio managers that never mark to market” – they find it easy to overlook the times when they’re wrong
  • Media effects:
    • Following events makes people feel they’re actively involved and well informed
    • People think and act with more confidence when they consider themselves informed
    • Media pundits often are no more insightful than the rest of us
    • People tend to follow media outlets that confirm their beliefs
    • Following the media experts can be a waste of time intellectually
  • A lot of people’s lives would be more tranquil and more productive if they accepted that what the media says about an upcoming event won’t have any impact on the outcome

What Do the Experts Know?

  • New York Post’s “NFL Bettor’s Guide” in 2015, covering 256 games over the full 17-week season:
    • Best picker was right 55.1%, worst picker was right 48.8%, and average was 51.6%
    • When experts specified up to three “best bets” each week, best picker was right 62.7%, worst picker was right 43.1%, and average was 54%
  • Overall results are distributed around 50/50 – experts’ process is little more than a coin toss
  • 8 of the 11 pickers were right more than half the time but since it costs about 5% per week to bet with the bookies, virtually none of them added value after fees
  • Economists won’t even publish their performance data

The Importance of the Macro

  • Today many analysts seem preoccupied with central bank behavior, government actions, trends in the interest rates and currencies, and the movement of the markets, as opposed to individual companies
    • All we hear about and most people think the outlook for them holds the key to success
  • When will Fed raise interest rates?
    • How would I know and why do I care? Likely date of a rate rise is not a very useful piece of information
  • What could go wrong?
    • I can guess at “improbable disasters” like acts of war, disinflation
    • Greatest single influence of the last 3 years was the 75% decline in oil price – but who predicted it?
    • Good times can’t roll on forever but you don’t know what the catalyst would be – that’s why they are called surprises
  • Instead of asking for what inning we are in, suggest investors ask whether things are or are not in an extended state (i.e. is the capital market shut tight, normal or unthinkingly generous?)
    • These are questions that can be answered in a helpful way

Opinions of Opinions

  • There are no facts about the future, just opinions
  • Developments in economies, interest rates, currencies and markets aren’t the result of scientific processes; involvement in them of people with emotions, foibles, and biases, renders them highly unpredictable
  • “Imagine how much harder physics would be if electrons had feelings” (Richard Feynman)
  • “It ain’t what you don’t know that gets you into trouble. It’s what you know for certain that just ain’t true” (Mark Twain)
  • Everyone at Oaktree has opinions on the macro but when conditions are moderate or indistinct, we don’t heavily bet

What about Facts?

  • “Fake news” emerged as a significant issue in 2016 – ease of access to social media makes it simple to create and disseminate fabrications
  • Concerned about the disappearance of real facts – anything nowadays can be dismissed as “a matter of opinion”
  • Can there be no distinction between opinion, fact, and fake fact?

The Last Word

  • Warren Buffett pointed out that for a piece of information to be worth pursuing, it should be important, and it should be knowable
  • Investors are clamoring more than ever for insights regarding the macro future but these things are likely unknowable
  • Excerpt from the Observer article about the media:
    • “If you wish to improve,” Epictetus once said, “be content to appear clueless or stupid in extraneous matters.” One of the most powerful things we can do in our hyperconnected 24/7 media world is say: “I don’t know.” Or more provocatively, “I don’t care.”
Image source: All News PipeLine
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1 Comment on Memos from Howard Marks: Expert Opinion

  1. Ronald E. Baker // January 13, 2017 at 12:12 pm //

    “More things are wrought by prayer than this world dreams of…” is a motto nearly lost in today’s secular scramble. When we simply don’t know and the future seems darkest, watch and pray. Britain did, in the second half of 1940, filling the churches after Dunkirk, praying earnestly for survival and victory against hugely poor odds. Never has the survival of so many, depended upon so few, perhaps only 1,000 ‘Blue Birds’ over Dover,. ‘Be a Gideon oh ye of little faith’ was our watchword then as it must be now: Watch and Pray! We should never forget this. Honestly, we really know very little and can only hope to learn more. Some things do follow cycles, however, and trends have a way of turning into cycles of birth, growth, maturity and decline. To seek to perceive the future we can, at least, try to ascertain where we are in the current cycles and act accordingly. A young man feels he’ll live forever, with plans stretching out for 7 times 7 year cycles ahead, ending in a 50th Jubilee year. An old man knows he’ll soon die; both plan accordingly. Older people have better perspectives while young are full of hope and dreams. We need an intelligent balance of both. So, I say: Plan, Work, Watch and Pray will most often carry the day, especially if we are humble, like Gideon, along the way.

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