Just to underscore why, as a macro guy, I focus so much on tail risk, here’s a little reminder from Dylan Grice ca. 2010:
Most people would see the macro strategist’s role as timing macro events … switching between defensives and cyclicals, adjusting duration, risk-on/risk-off trades, and so on … the only problem is that most of us are rubbish at seeing macro events coming, let alone timing them, as our evolutionary programming blinds us to events which are forecastable (and many are not even that). Perhaps we should embrace our limitations by accepting that ‘outlier events’ are actually quite regular, and use macro research to aid in the search for appropriate insurance strategies.
So if our confidence in our forecasting ability is for most of us more likely to be reflecting a cruel trick of our evolutionary development than any real ability, is macro research completely redundant? I don’t think so. In fact, I agree with David Einhorn’s conclusion of‚ when appropriate, buying some just-in-case insurance for foreseeable macro risk”.
There are two broad approaches to a more insurance-based approach. The first and most simple is the avoidance of the purchase of overvalued assets. Ensuring an adequate margin of safety against the unknown and unknowable future – rather than trying to predict it – is the central philosophy behind Ben Graham’s concept of value investing and one of the simplest differences between investment and speculation.
The second approach is to focus on the‚ grey swans‛ – the tail risks which are predictable – by devoting time to thinking about them and to finding effective and efficient protective insurance should they happen.
Can you think of any grey swans on the horizon? I sure can…