This post was originally written for the CFA Society India website and was published under the ‘Express’ section on 25th Sep ‘22.
“Manish, what’s your view on the US Markets?”
I said “I don’t know, It’s too confusing out there”
He replied “That’s very disappointing. You are a CFA and a Wealth Advisor, you ought to know.”
I had no words for people’s expectations of me being the Nostradamus of US Markets.
“I don’t know” - when did this become a wrong statement? Is it that people are so scared of uncertainty that they would believe anyone with some view, some glimpse into what is going to unfold tomorrow? Or is it that people believe a lie about someone’s abilities and keep looking for confirming evidence of that lie to uphold?
There are very few things in life that one can know with absolute certainty. I know working out is good for my health, I know that a good sleep of 7-8 hours does wonders to my productivity the next day, I know that Titan is a very good business, and I know that Warren Buffett has inspired millions of investors globally.
But will Titan be in business even 25 years down the line? There is a high probability of it but no certainty. Will Buffett get his bets on Occidental Petroleum or NuBank in Brazil right? I don’t know. Will I live till 100 if I worked out, slept well, and took care of my health? I don’t know for sure. I hope so.
But there are many things that just cannot be known. What will be the stock price of Titan 3 months from now? What will the inflation numbers be next quarter or next year? How high will interest rates go in the US? Will stock ABC be a 100-bagger if you hold on for the long term?
If you have read about black swan events, then you would know that these are unknown unknowns and it may give you an impression that these events happen once in a blue moon. This could be comforting to know as it makes the process of investing look doable, predictable, and a seemingly smooth ride. But that might be the very illusion that seduces traders, speculators, and active investors into chasing mega riches in the stock markets, eventually crushing their hopes with regular flair.
Just look at the last few years - demonetization, COVID pandemic, Russia-Ukraine war, US Fed Rate hikes, Oil Futures going to 0, European industry shutdowns - these are all uncertain or unknowable events with ramifications across global markets. And all of these have happened in just the last 4 years.
Black swan events are events that no one could have predicted or even seen coming. Uncertainties or unknowable events are very difficult to measure up and plan for, as the range of outcomes could be very diverse. Either way, there are so many moving variables affecting the price movements of securities in capital markets, that it would be impossible to state with significant confidence that this particular stock will be trading at this price in 3 months' time. Hence I find the Target Price (TP) on research reports very misplaced.
It may signal the effort gone into analyzing the company and the extreme usage of Excel and its various functions. But what it misses out on is the possibility of an event that could nullify the very thesis upon which the TP has been based on.
The bizarre part of many sell-side institutions is that the TP changes immediately in response to events nullifying the thesis in the report provided earlier. This would be fair if uncertain events were rare, but they are not. The world has only become more interconnected, making the systems very fragile and vulnerable to constant disruption and challenges from places that aren’t being studied or analyzed.
Byjus was the poster boy decacorn for Indian startups just yesterday, and today the whole facade is coming down on the financial acrobatics they used to get here. Facebook was the biggest ever advertising business globally until Apple’s ATT gave a knockout punch to their entire business model. Zomato was the success story of the WFH phenomenon, but increasing interest rates have made the erstwhile cash burn unsustainable.
The future may look rosy but it may not turn out to be (2021). The management may have shown promising signs but could slip again into their old habits (DHFL). The industry could be surfing on a tailwind, only to be tossed off balance due to global uncertainties (IT). The country may have the highest growth rates, but its stock performance could turn out to be dismal (China).
As Morgan Housel put in a recent newsletter, “The inability to forecast the past has no impact on our desire to forecast the future. Certainty is so valuable that we’ll never give up the quest for it, and most people couldn't get out of bed in the morning if they were honest about how uncertain the future is.”
It just isn’t easy to figure out the future. Anyone who claims the contrary may just be lying.
So be watchful of all the fortune tellers selling courses online that will turn you into the next Warren Buffett or Rakesh Jhunjhunwala. Be skeptical about the youtube influencers who have already seduced a lot of millennials to lose money on various crypto-related projects. When you meet anyone that claims to have superpowers to see in the future and predict events, just pick up your wallet and run.
It seems like overconfidence and storytelling have gripped the psyche of investors looking for low-hanging fruits, and they’re willing to bet their house on them.
Please don’t become one of them.
Look for people who are honest about the knowledge they have and are aware of their limitations. Look for people who don’t hesitate to state “I don’t know”. Look for people who say NO to most things. Look for people with a process in place and the discipline to stick to it.
There are many out there. You will find them if you just raise your standards high enough for letting quality people enter your zone.
All the best for finding them out. They aren’t waiting for you but they will be happy to meet you.
Recommendations for the week #
I have been visiting my family in Mumbai and have been off the grid mostly. I haven’t read much investment-related material but rather opted for immersing myself in fiction and mythology. Hence my recommendations come from these genres instead of the usual.
Last few days, I have been visualizing the Indian navy heading toward the Lankan coast to take on Raavan and his bloodthirsty army. I have spent time understanding the motivations of Raavan to abduct Sita and the principles of dharma that Ram & Sita espouse. I have enjoyed the 4th book in the Ram Chandra Series and it has immersed me in the well-known mythological story of Ramayana. ‘War of Lanka’ is a page-turner and I am loving it !!
My wife and I just finished Delhi Crime Season 2 on Netflix. We thoroughly enjoyed the 5 episode series. Shefali’s acting along with other cast was fantastic. The show keeps you hooked till the finale and its depiction of Delhi is as close to reality as it could get. 5 Stars for this one.
I came down to Mumbai to just spend time with my parents, watching TV and enjoying cricket with them, dining together - the small pleasures of being together as a family. I have enjoyed my time here and will be heading back to Dubai tomorrow night.
Till my next post, wishing you all a fantastic weekend ahead 🥂
Loads of Love & Luck.
Manish