The Rational Investor #017: Max Gunther on Forecasting & Randomness
Happy Saturday to you,
Welcome to the 17th edition of The Rational Investor Newsletter.
Today’s quote appears in the book The Joys of Compounding by Gautam Baid, but the quote originates in the book, The Zurich Axioms (which I have not yet read) by Max Gunther. Amongst Baid’s own investing wisdom, The Joys of Compounding contains countless great quotes from across the investing landscape and the following quote is one of the great (and long) ones included. I am sharing it exactly as it is written in Baid’s book with no changes, emphasis, or italics added by me. It is that of the author.
Because of its length, I will have minimal comments to follow as I think the quote is plenty impactful on its own.
Onto the main event…
Here’s Gunther on Forecasting & Randomness in the Market:
The fact is, nobody has the faintest idea of what is going to happen next year, next week, or even tomorrow….It is of the utmost importance that you never take economists, market advisers, or other financial oracles seriously.
Of course, they are right sometimes, and that is what makes them dangerous. Each of them, after being in the prophecy business for a few years, can point proudly to a few guesses that turned out right. “Amazing!” everybody says. What never appears in the prophet’s publicity is a reminder of all the times when he or she was wrong.
“It’s easy to be a prophet,” the noted economist Dr. Theodore Levitt once told Business Week. “You Make twenty-five predictions and the ones that come true are the ones you talk about.” Not many seers are that frank, but all would privately agree with Dr. Levitt’s formula for success. Economists, market advisers, political oracles, and clairvoyants all know the basic rule by heart: If you can’t forecast right, forecast often….
Not all oracles have been able to organize the annual forecast-revising dance of the economists, but all are followers of the basic rule. They all forecast often and hope nobody scrutinizes the results too carefully….
It is easy to get dazzled by a successful prophet, for there is a hypnotic allure in the supposed ability to look into the future. This is especially true in the world of money. A seer who enjoys a few years of frequently right guesses will attract an enormous following….
One of the traps money-world prophets fall into is that they forget they are dealing with human behavior. They talk as though things like the inflation rate or the ups and downs of the Dow are physical events of some kind. Looking at such a phenomenon as a physical event, an oracle can understandably succumb to the illusion that it will be amendable to forecasting. The fact is, of course, that all money phenomena are manifestations of human behavior….
…An oracle can always cry “unforeseeable events” in explanation of a forecast that turns out wrong. But that is just the trouble. Every forecast has the possibility of unforeseeable events ahead of it. No forecast about human behavior can ever be compounded of 100 percent foreseeable events. Every prediction is chancy. None can ever be trusted…
…Disregard all prognostications. In the world of money, which is a world shaped by human behavior, nobody has the foggiest notion of what will happen in the future. Mark that word. Nobody….
…Money seems cool, rational, amendable to reasoned analysis and manipulation. If you want to get rich, it would seem that you need only find a sound rational approach. A Formula.
Everybody is looking for this Formula. Unfortunately, there isn’t one.
The truth is that the world of money is a world of patternless disorder, utter chaos. Patterns seem to appear in it from time to time, as do patterns in a cloudy sky or in the froth at the edge of the ocean. But they are ephemeral. They are not a sound basis on which to base one’s plans….
…It is surprising how many smart people allow themselves to be fooled by the Gambler’s Fallacy….Toss a coin enough times, and sooner or later you are going to have a long run of heads. But there is nothing orderly about this run. You cannot know in advance when it will start. And when it has started, you cannot know how long it will continue. And so it is with roulette, the horses, the art market, or any other game in which you put money at risk. If you play long enough, you will enjoy winning streaks—perhaps some memorable ones….But there is no orderly way in which you can cash in on these streaks. You can’t see them coming, and you can’t predict their duration. They are merely one more part of the chaos….
In short, nobody, I repeat, nobody, knows what will happen next, which is why we must make our financial planning decisions based on a rational and probabilistic look at the course of history. Once we’ve done that, our only job is to “stay the course.” But naturally, that’s the hardest part.
Thanks for reading. I’ll be back again next week with more timeless wisdom from great investors.
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