I Believe Two Things (And That Might Be Enough)

August 21, 2015

2 minute read

I Believe Two Things (And That Might Be Enough)

Smart guys are the most dangerous. They are the most prone to overconfidence and the most susceptible to overthinking–both deadly sins in money management.

Nowhere does overthinking seem more prevalent than in global macro. The less one knows about a topic, the easier it is to elaborate a story that fits one’s biases and ideology. And there is no shortage of people who are trying to make a living pitching to our knowledge gaps and darker instincts. These days, terrifying macro stories rush to fill our information void with disturbing speed and regularity.

My response: fight to keep it simple. And I say fight because I have the same basic impulses as everyone else. It is extremely hard to not overthink—all the more so if one has a deeply ingrained fundamental background.

‘Keeping it simple’ for me means latching onto a couple of overarching themes in which I believe strongly and using them to tune out as best I can the macro noise du jour.

i believe two things

In today’s environment, the anchor themes are two.

1. Disaster Myopia. We are still living in the long shadow of the global financial crisis. Six years have passed, but we still return to ‘that place’ far too quickly. Worst case scenario, daily. This ease of recall induces us to over forecast tail events—even if Macroggeddon is 0 for 500 by now. Erring on the side of optimism is still the money trade.

2. Longest, shallowest cycle ever. The world continues its deleveraging. The US appears to be leading the rest of the world in the process. But the extrapolation of growth optimism on which all cycles end is just not there in the US—or anywhere else for that matter. And it doesn’t seem imminent, either. This implies two things: (1) the odds of a new recession in the US are low (you can’t commit suicide jumping out of the basement window), and (2) since bear markets typically come when economic cycles turn, a bear market in US equities is unlikely until the economy gets jacked up on excessive investment and hiring.

Yes, a lot of nuance is lost in these two points. But a lot of noise is left out too. Remember, it is easy to find reasons to sell; what’s hard is finding reasons not to every single day. Experienced investors know that riding winners is far harder than cutting losses. So, when your core theses prove broadly right, they are worth clinging to. It’s your best defense against getting chopped up and lost in the weeds.