“I wrote a memo a week for six weeks starting on March 3, but I’ve skipped the last three weeks”, Howard Marks says, kicking off his seventh memo since the onset of the COVID-19 crisis.
He’s apologetic about taking a three-week hiatus from blogging. “The string had to end sometime”, he sighs.
Indeed. But the break is over now, and Marks is back with a piece called “Uncertainty” which is all about… well, it’s all about uncertainty.
“Our inability to know the future is a theme I’ve touched on repeatedly over the years, but now I’ve decided to devote an entire memo to it”, he declares.
By his own account, Marks has become more philosophical recently thanks in part to the copious free time he’s had on his hands due to being homebound with the rest of humanity on virus containment protocol.
Not surprisingly, Howard says he’s been asked for his opinion on what shape the recovery will take (U, W or L). For those who may have missed it, below is a visual which shows you what respondents to BofA’s latest global fund manager survey think.
Marks says that due to the unprecedented nature of this crisis, it’s difficult for him to conjure even a guess.
He also suggests that his own experience has been rendered largely useless due (again) to the exigent circumstances. To wit, from the memo:
As everyone knows, today we’re experiencing unprecedented (or at least highly exceptional) developments in four areas: the pandemic, the economic contraction, the oil price collapse and the Fed/government response.
Given the exceptional developments enumerated above, however, there’s little or no history that’s relevant to today.
While unique developments like those of today make forecasting unusually difficult, the presence of all four elements at once probably renders it impossible. In addition to the difficulty of understanding each of the four individually, we can’t be sure how they’ll interact. For example:
- Will the massive, multi-faceted Fed/Treasury program of loans, grants, stimulus and bond buying be sufficient to offset the unparalleled damage done to the economy by the fight against Covid-19?
- To what extent will the reopening bring back economic activity, and to what extent will that cause the spread of the disease to resume, and the renewal of lock-downs?
Next, Marks spends a few hundred words emphasizing the indeterminate character of our reality as it relates to the virus and the interplay between the myriad embedded contingencies associated with the pathogen and investor psychology.
“Where am I going with this?”, he proceeds to wonder, aloud.
It’s clear that Marks has no idea, and by that point in the memo, the reader is similarly adrift.
He doesn’t provide a particularly satisfactory answer to his own question, but he does muse that in his judgement, even artificial intelligence can’t help us when it comes to parsing the interaction of the four seismic events mentioned above.
Who can respond to this many questions, come up with valid answers, consider their interaction, appropriately weight the various considerations on the basis of their importance, and process them for a useful conclusion regarding the virus’s impact? It would take an exceptional mind to deal with all these factors simultaneously and reach a better conclusion than most other people. (I believe a computer couldn’t do so either, especially given all the subjective decisions required in the absence of historic precedent.)
Howard then poses yet another question: “The challenge lies in trying to be above average in assessing the future. Why is that so hard?”
I can answer that: Because predicting the future is impossible. And things that are “impossible” are, by definition, as difficult as difficult gets.
Perhaps feeling as though he hadn’t gotten the point across, Marks continues:
Forecasting is difficult for a large number of reasons, including our limited understanding of the processes that will produce the future, their imprecise nature, the lack of historical precedent, the unpredictability of people’s behavior and the role of randomness, and these difficulties are exacerbated by today’s unusual circumstances.
He then quotes, in order, Lao Tzu, George Orwell, Peter Bernstein, Albert Einstein, and Aeschylus.
After that, he cites Warren Buffett, a man who, perhaps more than any other living soul, knows just how uncertain things really are right now. In fact, if you ask him, Buffett can quantify the level of uncertainty that prevailed over the first quarter of 2020. Things are around $50 billion worth of “uncertain”, according to Berkshire’s 10Q.
Having spent a truly inordinate amount of time backing up an assertion that needs absolutely no support considering it’s true by its very nature (i.e., nobody besides your local palm reader is going to argue with you if you say it isn’t possible to see the future), Marks reckons he’s about captured it.
“I think you get the point”, he writes. “I seem to be in good company in my belief that the future is unknowable”.
After taking readers on a torturous trek to prove something that didn’t need proving, Marks turns right around and says all of the collected wisdom he just cited actually isn’t right. If you’re feeling mentally up to it, read the following fantastically tautological ramble:
Having made that assertion, I’ll admit that it’s an extreme oversimplification and not entirely correct. There actually are things we know about the macro future. The trouble is that, mostly, they’re things everyone knows. Examples include the fact that U.S. GDP grows about 2% per year on average, heating oil consumption increases in winter; and a great deal of shopping is moving on-line. But since everyone knows these things, they’re unlikely to be much help in the pursuit of above average returns. As I’ve described before, the things most people expect to happen — consensus forecasts — are by definition incorporated into asset prices at any point in time. Since the future is usually a lot like the past, most forecasts — and especially macro forecasts — are extrapolations of recent trends and current levels, and they’re built into prices. Since extrapolation is appropriate most of the time, most people’s forecasts are roughly correct. But because they’re already reflected in security prices, most extrapolations aren’t a source of above average returns.
That can be roughly summarized by simply noting that markets are some semblance of efficient when it comes to pricing things that everyone knows.
Marks is hardly finished. Next, he reminds you that truly lucrative bets in markets are those that are based on forecasts which correctly predict multi-standard deviation events, another laughably self-evident assertion. Here’s Howard:
The forecasts that produce great profits are the ones that presciently foresee radical deviations from the past. But that kind of forecast is, first, very hard to make and, second, rarely right. Thus most forecasts of deviation from trend also aren’t a source of above average returns.
I’m not going to sugar coat this: Marks’s latest memo is, in my judgement, a total and complete waste of your time and, more tragically, of Howard’s. A man of his considerable resources and intellect could have doubtlessly found something fruitful and lucrative to do with the hours that went into producing what is, frankly, a laughable attempt at philosophical profundity.
He closes with the following list of conclusions (and these are verbatim, unfortunately):
- The world is an uncertain place.
- It’s more uncertain today than at any other time in our lifetimes.
- Few people know what the future holds much better than others.
- And yet investing deals entirely with the future, meaning investors can’t avoid making decisions about it.
- Confidence is indispensable in investing, but too much of it can be lethal.
- The bigger the topic (world, economy, markets, currencies and rates) the less possible it is to achieve superior knowledge.
- Even our decisions about smaller things (companies, industries and securities) have to be conditioned on assumptions regarding the bigger things, so they, too, are uncertain.
- The ability to deal intelligently with uncertainty is one of the most important skills.
- In doing so, we should understand the limitations on our foresight and whether a given forecast is more or less dependable than most.
- Anyone who fails to do so is probably riding for a fall.
With deep apologies to Marks (for whom I have as much respect as anyone else, and probably more), each and every one of those bullet points sounds like it walked directly out of the executive summary attached to a C+ (at best) freshman term paper.
And listen, folks, I am fully apprised of the extent to which many (and likely most) of you are devoted Marks fans. But I implore you, read those bullet points again. Take this one, for example: “The ability to deal intelligently with uncertainty is one of the most important skills”. Having spent decades in academia around folks who taught at the undergraduate level, I can say with confidence that if you were to write that sentence down on an scrap of paper and put it in a pile of other scraps of paper on which you quoted nebulous statements from the introductions and conclusions of undergraduate papers, then tossed them all in a hat and drew them out at random, it would be impossible to distinguish Howard’s remarks from the rest.
About that much, I am certain.