October 2024
IN THIS ISSUE
Risk management for a life portfolio
Flight attendants, prepare for a soft landing
All polls are wrong, but some are useful
One of the unique benefits of writing a newsletter is that I get a written snapshot of my mindset at important times in my history. I started writing in July 2020 which, at risk of stating the obvious, was a heck of an interesting time for investment management (deep uncertainty in pandemic-impacted markets), politics (Clinton vs Trump presidential election), medicine (what are mRNA vaccines), education (Zoom schooling), and anyone who wants to survive a global pandemic.
Rereading prior newsletters can help us learn from our prior thinking once the future becomes known. Deciding what to write about provides insight into which topics I thought were important enough to write about… and which topics (especially trendy topics) should not make the cut. And importantly, I can’t think of many better ways to protect against hindsight bias than to have a static, written summary of my thinking to keep overconfidence in check for future decision-making.
So indeed, I am among my readership as beneficiaries of my writing.
Since the presidential election is next week, and to further emphasize the unique insights that can come from rereading prior newsletters, please enjoy this reprint from November 2020 when, among other life challenges, I had to explain to high school math students what just happened in the Clinton vs Trump election:
All polls are wrong, but some are useful
Think back to Wednesday, November 9th, 2016. Students were asking me “What happened?” Yes, the polls were “wrong”, but how is that possible? My answer was “that’s just statistics”. Sampling methods, sampling error, margin of error, nonresponse bias, all the basic stuff.
Folks place such high confidence, almost certainty, in anything numeric - and investing has a lot of numbers.
Reputable pollsters quantify the amount of sampling error inherent in their methodologies. When surveys report a ±3% margin of error at a 95% confidence level, they are saying that if their survey methodology were repeated many many many times, the true population value will be within 95% of those ±3% wide intervals. Which means… 5% of the confidence intervals will not capture the true population value. Necessarily, there is sampling error anytime one surveys roughly 1,000 people then extrapolates to 100,000,000 people. That’s just statistics.
The math we teach in schools is sanitized and certain; the math of the real world is, well, not. As a math teacher I was saddened in 2016 and again this month when Lindsey Graham (and others) said “To all the pollsters out there, you have no idea what you're doing.” Real world data is messy. Predicting voter turnout - or anything involving humans for that matter - is more difficult than most folks realize. As they did in 2016, this year’s pollsters will again gorge in the 2020 election data, test explanatory hypotheses, update and upgrade their models, and be ready to do it all over again in the next election.
Which brings us to investing! Forecasting the future, quantifying uncertainty, making sense of data - investment math is not all that different from election math. The accuracy of investing models during this pandemic is perhaps universally in-question due to the unique nature of both the COVID-19 pandemic as well as the government’s unprecedented response. Ray Dalio, continuing to endure historic losses in Bridgewater’s flagship Pure Alpha II fund, finally ceded his usual steadfast confidence in his models when they stopped working and spent 70 hours per week along with his staff to revise their models. It’s what modelers do.
The well-known statistician George Box said “All models are wrong, but some are useful.” Well, all polls are wrong, but some are useful too. The first step to understanding is a pinch of mathematical literacy.
ONE MORE THING…
Risk management for a life portfolio. Meir Statman argues for risk management of our “life portfolios” via investment risk, career risk, and social risk. Investors Spend a Lot of Time Thinking About Risk. But They Do It All Wrong. - WSJ
Flight attendants, prepare for a soft landing. Significant risks remain. But the Fed *might* be vindicated after all. Fed close to pulling off the elusive economic soft landing in 2024 after great September jobs report
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