January 2024
IN THIS ISSUE
Market forecasting is hard
Short pain
Active vs Passive
UPDATE: Go to Cash for 7 years… ooof
This is a performance business. To perform over the long run, managers need a reliable process that properly discounts most financial news, parses signal from noise, objectively attributes outcomes to luck versus skill, and apply Decision Science to make better decisions.
How then, as the late Charlie Munger advocated, do we develop reliable mental models for making sense of new information?
My go-to answer here is to rigorously ask Where Are They Now? to help us learn from prior calls and outcomes. Because if we don’t, we are more Likely to be swayed by the next attention-grabbing, and performance-sapping, headline.
As Likelyhoods readers know well, every January (2021, 2022, 2023) I revisit the “bold contrarian call” by KCI Research in January 2021 that It's Time To Go To Cash For The Next 7 Years. Interestingly, after the first year when their call was early but nevertheless not yet materializing, KCI stood by their call, so this is not just some one-off claim to be easily dismissed.
(To refresh your memory of what was happening in January 2021, here is ChatGPT’s summary which includes COVID-19 stimulus measures, optimism among investors for economic recovery following vaccine rollouts, the GameStop trading frenzy, growing interest in cryptocurrency, and increasing discussion of low interest rates and fiscal stimulus on the potential for higher inflation.)
So how would investors be doing who acted on KCI’s call? Where Are They Now? Here:
As I wrote in January 2023, the market’s selloff throughout 2022 was “about as favorable of an outcome as KCI Research could have hoped”. At the worst of the selloff, the Vanguard 500 Index Fund ETF (VOO) dropped to slightly below the T-note, fully retracing the 2021 blowout gains that made the bet look silly in the first year.
Now 2023 has fully reversed the 2022 selloff. A $1,000 investment in VOO in January 2021 would now be worth $1,243.82, versus the T-note’s $1,019.75. We are now 3 years into this 7 year call, and anything can still happen. By year 7 cash may come out ahead of VOO, nobody knows. All we can do is bet in Likelyhoods and let the mathematics tend to play out in our favor in the long run. That’s what I call Thinking in Likelyhoods.
ONE MORE THING…
Market forecasting is hard. Forecasters missed the mark by a mile by the end of 2023, but relatively poor predictions have been the rule rather than the exception for the past 20 years. 2023: Another miserable year for market forecasters (Mathematical Investor)
Short pain. “‘This year's mark-to-market losses offset two-thirds of last year's $299.1 billion of short-side mark-to-market profits,’ S3 said in a report published Wednesday.” Investors lost $195 billion shorting stocks in 2023. Here were the 10 most painful bets.
Active vs Passive. This trend sure seems persistent. Passive investing rules Wall Street now, topping actively managed assets in stock, bond and other funds
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