As we write this quarterly letter, we have been inundated by news on the “Brexit” issue. Markets turned volatile over the last few weeks, starting by going up on speculation that the Brits would not leave. Then, the referendum results revealed that they actually wanted to leave, triggering panic selling for two days followed by a huge rally, recouping all the losses incurred on the panic selling to finish basically flat for the quarter. It seems to us that there is a lot of noise but not much in content in whatever the market experts are expressing on TV, the newspaper or other forms of media.
All the “mumbo jumbo” over the last few weeks brings us to these 2 observations:
- One of the best parts of the internet is that the average investor has access to myriad real time news and opinions.
- One of the worst parts of the internet is that the average investor has access to myriad real time news and opinions.
The easy access and abundance of free data, analyses and opinions has made the “cost of investing” much more affordable to the average person in the last decade. However, it does not make it easier to make money for the following reasons:
- With the abundance of opinions, which one should you pay attention to?
- Who should you trust among the thousands of so-called “market experts”?
- Which of these opinions and analyses are truly useful for your investment plan?
The real questions are:
- Is the access to free information actually free?
- How do you define the cost of investing? When a lousy analysis makes you lose money, is it part of the cost?
Believe it or not, investing is not about winning or losing. It is about making money. There is a huge difference between having opinions and making money. Lots of people have opinions. Some even use them to make predictions and forecasts (think of all the investment letters or articles in the business section of your newspaper). They generally are very good at grabbing your attention. Should you act on them?
Here are a few ideologies that we try to live by in our day-to-day work managing money:
A probability function
It is easy to have all the opinions in the world when there is no money at stake. However, since we manage real money (ours and especially yours), we cannot worry about being right all the time. We can only worry about how much it costs when we are wrong and how much we make when we are right. It is a “probability” function, not a “right-or-wrong” one.
We are not out to impress others
Let us mention a few of Warren Buffett’s best quotes:
- “You don’t need to be a rocket scientist. Investing is not a game where the guy with the 160 IQ beats the guy with 130 IQ.”
- “If you are in the investment business and have an IQ of 150, sell 30 points to someone else”.
High IQs, argue Buffett and Munger, could be a real hindrance, especially when that brainpower generates complicated mathematical models that purport to predict the future. For mathematics is beautiful, it gives these geniuses the over-confidence that eventually becomes their downfall. The 1998 financial crisis created by the Nobel Prize winners of Long Term Capital Management almost brought down the global financial system. As Buffett commented: “It only happens to people with high IQs. Those of you with an IQ of 120 are safe”.
We don’t care about “Conspiracy Theories”
You don’t have to look very hard to find on the internet a whole bunch of naysayers who vent their frustration and lack of investment success to what we call “conspiracies” against the individual investor. It goes from market manipulation, Fed conspiracies, faulty inflation statistics and many more. None of these can be proven but it does scare investors. It certainly sells newsletters and gets people’s attention on social media.
However, if you have long memories or are interested in history, you could probably find the same “conspiracy theories” in the past and would conclude that over 90% of them proved to be just plain wrong. The other 10% could well be right for the wrong reason.
There is no certainty in investment
As the “Brexit” event rolls on, we heard experts talking about markets going down because of “increased uncertainty”. OK then. So what about the markets going back up in the last 3 days (i.e. 28th, 29th and 30th of June)? Has the world become more certain now than on the 24th and 27th of June? Not only is it all hogwash, these commentators are actually inflicting brain damage to people listening to them. Since when do we have certainty in markets?
Anyone promising you certainty in terms of performance in the future is certainly a charlatan. In investment as in life, “always” and “never” are the most dangerous words.
We don’t care about ideologies
There is no room for ideologies in investment. The market does not care about your political beliefs. Investment is about making money over the long term. It does not mean we don’t complain about our politicians, and we do have social and political beliefs. We try very hard not to let our beliefs cloud our judgment when making investment decisions. Knowledge and process should always take precedent in investment methodologies.
We would like to make some changes in the way we write these quarterly letters. In order to speed up the time between the end of the quarter and the reception of your quarterly reports, we would write a shorter letter to be included in your report. However, we would write more often during the year if there are ideas or comments we would like to communicate to you on a timelier basis instead of waiting until the end of the quarter.
We welcome your comments on this new initiative.
Have a good summer.
The Claret team