1. Everyone will continue to make predictions despite overwhelming evidence that predictions are useless.
My father has been an incredible mentor, but you’d be surprised how few investing lessons he’s ever taught me. There were never lessons about ratios or sectors or discounted cash flows. Instead when I was growing up there was just one simple requirement: if you want something, produce a compelling argument and we will give you what you want. The emphasis was almost exclusively on how to think and how to build an argument with good evidence. I was rarely taught what to think.
But there is one thing he taught me which still sticks with me (mostly because I had no idea what the hell he was talking about, I was 12 years old). He said, “People are deterministic thinkers in a probabilistic world.”
Over the years I figured out that he meant was that we are pattern junkies obsessed with identifying patterns and extrapolating them into the future, and we fail because the future isn’t pre-ordained and deterministic. His lesson was: you should never bet on specific outcomes, but rather bet on high probability outcomes. This is very good investing advice.
But sadly humans don’t think like that. We see two of something and automatically predict a third. My favorite example of our pattern addiction is a study referenced by Jason Zweig in his book Your Money & Your Brain, which pitted humans against pigeons. Both humans and pigeons were show two lights, one red and one green, which were flashed 20 times per round. The lights were rigged such that the green one flashed 16 of the 20 times (80%), but other than this rule the sequence was entirely random. Rewards were given to people and pigeons when they guessed the next light correctly. The pigeons quickly figured out that the best strategy was to just guess green all the time, and their average score was about 80% correct. But us stupid humans, obsessed with prediction and patterns, constantly tried to outsmart the odds by guessing red occasionally—the end result being a score of just 68%. Stupid humans.
The best way to look at the future is as Howard Marks suggested in his last memo, “the future should be viewed not as a fixed outcome that’s destined to happen and capable of being predicted, but as a range of possibilities and, hopefully on the basis of insight into their respective likelihoods, as a probability distribution.”
Bottom line: I predict that our predictions will suck.
2. Some book will be a massive bestseller, and no one will read it. We should create an award for this perennial snoozer and call it “the Piketty.” Mark Twain had it right: a ‘classic’ is a book which people praise and don’t read.
3. Some asset class, currently despised, will explode upward. Energy stocks, perhaps[i]?
4. I will announce a huge and very fun new project at some point during 2015—one that will require your help. I know this one is coming true 😉
5. I hate predictions so much I can’t even come up with 5.
[i] THIS IS NOT A PREDCTION