A couple of weeks ago I was at our local library checking out the Barron’s weekly. They had their annual roundtable issue out. Every year in January, Barron’s invites a few successful well-known money managers to gather around a table and discuss their thoughts for the new year. First, they’d discuss their predictions for the economy and the stock market. Then, each manager picks his or her favorite stocks and industry sectors for the new year.
Later, as I was leaving the library, I stopped by the book sales corner — where donated old books go on sale. It’s an old habit of mine. Every once in a while, I find a good book there. That day, I found a copy of Peter Lynch’s Beating the Street. I had read his first book and enjoyed it — a bestseller of its time, One Up on Wall Street. A dollar for a clean copy of this 1993 book seemed like a good bargain. (Our library’s suggested donation rate is $1 for paperbacks and $2 for hard-covers.)
I’ve found that old books that are still around are often better reads than many new publications that might not live up to the hype. The longer a book has been around, the longer it will continue to be around. This is known as the Lindy Effect for books.
Anyhow … going back to the book, I found it a good and easy read — much like Lynch’s first book. Peter Lynch, for those who might not know, was a star mutual fund manager of his time. His fund, Fidelity Magellan, beat the stock market for 13 consecutive years while he was at the helm. He retired in 1990 while still in his mid-40’s. This book was written three years after he stepped down from Magellan. As I read the book, I found an unexpected connection between the book and the Barron’s roundtable that I was reading earlier in the day. Lynch devoted an entire chapter to it. He participated in many of those annual roundtables in the 80’s and early 90’s. This wasn’t unexpected of course. He was very well known back then. It was his takeaways from those events that caught my eye. Especially about the first half of the roundtable discussions where they all would discuss direction of the economy and the markets.
In the book, he called those annual discussions our “weekend worrying”.
Weekend worrying is what our panel of experts, in the first half of the Barron’s session, practices year after year … It was worth noting that our worrying peaked in the 1988 Roundtable session, held two months after the Great Correction. We’d just suffered this major collapse in the stock market, so of course we were looking for another one for the following year.
Peter Lynch, Beating the Street
If you had paid close attention to the negative tone of most of our “whither the economy” sessions over the past six years, you would have been scared out of your stocks during the strongest leg of the greatest bull market advance in modern history.
Peter Lynch, Beating the Street
Just that chapter alone was worth my time spent reading the book. (And of course, a great return on my one-dollar investment.) It gave me a new perspective. I went back to the library and read the roundtable section again. Economic worries of today are different than those in Peter Lynch’s time. And yet they are similar in spirit and tone.
For more on prognostications, let’s turn to another well-regarded successful money manager, Howard Marks of Oaktree Capital. He argues that predicting the direction of the economy or the stock market is futile. He believes that the future is unknowable, and investors would do considerably better if they come to terms with that.
He points out that while it is always possible to find one expert who correctly predicted the last major recession (or a market correction), if we view that expert’s entire collection of past predictions, we won’t find much predictive power in it. Moreover, collective predictions of expert economists have never been of much value either. In a previous blog post, Nobody’s good at predicting recessions, I shared a chart from the Federal Reserve that showed the predictive performance of professional economic forecasters. There wasn’t much predictive power in their collective judgments. As a group, they failed to predict a single U.S. recession going back to 1969.
Marks wrote about two types of investors — those who think they can predict future and those who don’t:
Investors who feel they know what the future holds will act assertively: making directional bets, concentrating positions, levering holdings … On the other hand, those who feel they don’t know what the future holds will act quite differently: diversifying, hedging, levering less.
Howard Marks, The Most Important Thing
Bill Gross, who just this month announced his retirement, made a bold prediction about the U.S. economy in 2009. He called it the “new normal”. He predicted that the Great Recession of 2008 would not give way to a new decade of prosperity. Instead he predicted that in the following decade, the economy will just plod along at very slow growth rate, stocks won’t deliver better returns than bonds, and that dollar will lose its reserve currency status. See Morningstar’s May 2009 coverage on the “new normal” here.
A few years later (2013), Warren Buffett was asked this question at Berkshire Hathaway’s annual meeting:
Every time Bill Gross writes as essay on the “new normal”, I get more depressed about prospects of my retirement. Do you share his views that the market returns in the next few decades will be much lower?
A Question at 2013 Berkshire Annual Meeting
Buffett replied that he and Charlie Munger didn’t pay any attention to macro forecasts. He said: “we don’t know them. And we don’t think anyone else does either. I can’t think of a time when we made a decision on a stock or a company where we talked about macro (forecasts)”. He went on to say:
To ignore what you know because of predictions about what you don’t know and nobody else know … is plain silly.
Warren Buffett, 2013 Berkshire Annual Meeting
See the full video clip of the Q&A here.
Another time (this was in 1998), he was asked about his views on world’s business environment for the following decade. He said we only tried to think about things that were important and knowable. And predicting the economy is important but unknowable, so they didn’t indulge in it. See this video clip. He then went on to say that they did have an opinion on how Coca Cola, or Disney, or Gillette would look like in ten years. All were his major stock positions at the time.
In my investing, I try not to be a weekend worrier. Barron’s will continue to invite famous investors every year in January for a discussion on economy and market conditions. These experts will continue to prognosticate and yet I don’t need to pay attention — much less let it affect my investing regimen.
Whether I am investing in index funds or individual stocks, I try to invest gradually and patiently. Short term directional changes in the U.S. economy don’t matter to my investing. I trust its long-term gradual upward trajectory. Peter Lynch said the following in the book:
A successful stockpicker has the same relationship with a drop in the market as a Minnesotan has with freezing weather. You know it’s coming, and you’re ready to ride it out.
Peter Lynch, Beating the Street
I am in that second group of investors that Howard Marks wrote about. Those who know that the future is unknowable. We know the limits of our foreknowledge, so we act prudently.