Growing up in the seventies and eighties meant that the only source of information was books.
This was a rich source of data, especially encyclopaedias. But I also used to love going to village fetes and finding old books which provided an insight into explorers, trade, and the development of the world.
Often facts were things that we saw with our own eyes. As a young boy I was taken to Bergen-Belson concentration camp. The facts were clear to see. There was total silence, not a bird could be heard. The horror of what had happened was evident.
I also stood at a border point between East and West Germany, where flowers were laid representing people who had tried to escape to the West and failed.
During the nineties and noughties things started to change. The availability of information meant that it became harder to consider facts.
In 2016 the UK voted to leave Europe. On both sides facts were used to persuade us as to which way we should vote. In reality most of these “facts” were not true. Decisions were made on the facts that were presented to us. As a result, some people have since regretted the decision they made.
Fast forward to today and we have a “scandal” surrounding a news reader. The only facts that we have are those that have been stated in the press. As a result of these “facts”, many have formed an opinion around his guilt. In reality, the only facts we have in the case are that complaints have been made. These are being investigated and a decision will be made based on the true facts of the case rather than those that have been written about.
Fact, fiction, or opinion? That is the world we live in.
When it comes to investing, the debate I sometimes have is whether this is a form of gambling. I do believe there is an element of truth to this. We live in an era of instant gratification. If we want something we want it now. If I invest, I want an instant return. If that doesn’t happen, then I move on. That is gambling. Always chasing the next big thing and wanting it now. As an example, below are the returns on the Crypto Market in 2021. Who wouldn’t want some of these returns!?
I was listening to a fund manager discussing the skills of investing. One phrase struck me, “begin with the end in mind”. The point being, where do want to get to?
When I first started investing, I remember being told that if I invested £10,000 in day 1, went away for 10 years, and was then given £20,000, would I be happy?
The answer would likely be yes. If I changed it around and said at one point it was £30,000, would I feel an element of disappointment?
It is very easy to lose sight of where we have come from, especially when it comes to money.
One of the greatest challenges today is information. We know what has done well over the last ten years, and it is hard to consider that it won’t do well over the next ten. So, we form a bias to what we want to see happen rather than consider the facts.
The last 18-months have been a tough period for investors. It is at this time we need to focus on that end point. The chart below shows the movement of the S&P Index and the flows of money.
What this tells us is that often investors lose sight of the end point during the toughest periods. We get that it really is not comfortable now.
So, what is the wall of worry today?
Much of this is US focused, but probably the three uppermost in our minds are rates, inflation, and recession.
Economists will be keen to tell you what will happen. I love a piece by Howard Marks on “The Illusion of Knowledge”. He ends his piece with a quote from an economist he spoke to, “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.”
Really it is drilling down to the facts. As it currently stands:
- Inflation will peak and come down. This will differ from country to country.
- Interest rates will peak. They may stay at that level for some time, and they may come down.
- A recession is likely. The extent may differ from country to country.
- A recession tends to be good for markets.
We can overlay some of this with facts. Below are 12 variables which have historically foreshadowed a looming recession in the US. It doesn’t tell us when, but it does tell us that using historical information, everything points towards a recession.
The second data point is the behaviour of markets. The chart below shows the S&P 500 performance coming into a recession.
It is also worth considering the table below when we consider the current rise of the S&P500.
And then ending with this, market lows have come around two-thirds into a recession.
The point with all of this is that by looking at past data, we can factually state what has happened and therefore see the possible implications for the future. What we know is that based on the 12 variables the US is closer to a recession. Looking at the facts and past data, it would imply that the S&P 500 will pull back but will start a more sustained recovery during the recession when it comes.
When all of this comes is anyone’s guess, but many are hoping for this sooner rather than later.
In terms of inflation and interest rates, forecasters are paid to make an educated guess as to what will happen. We can look at charts. But as above, all the charts will tell us is what has happened in the past, and from this we might be able to see patterns. Most economists only tell you when they get it right. I suspect the reality is that their hit rate (i.e., getting it right) is relatively low.
As we have said before, all we know with any degree of certainty is that interest rates and inflation will peak and come down. At what point this happens and at what levels they settle is an area for debate. What we do feel is that it is unlikely we will return to a period of super low interest rates and stimulus as we have seen over the last decade or so. That means that things are perhaps more normalised (i.e., where we were pre-2008).
In summary, fact, or fiction? In a period of 50 years, we have gone from a restricted source of information to an overload of information. This means it becomes harder to distinguish fact from fiction. We also want to know what the future holds. The reality is that we cannot predict with any certainty what the future holds because there are too many variables at play. What we can do is identify what is happening today, overlay factual information of what has happened in the past and what this might mean for the future. But ultimately it comes down to keeping the end in mind.
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