Greek Philosophy, Tough Guys and Rubber Necking

In his most recent memo, Howards Marks of Oaktree (OAK) talks about forecasting. At one point he cites Greek philosophy to make his point saying ““If you wish to improve,” Epictetus [first-century Greek philosopher] once said, “be content to appear clueless or stupid in extraneous matters.” One of the most powerful things we can do as a human being in our hyperconnected, 24/7 media world is say: “I don’t know.” Or more provocatively, “I don’t care.” Not about everything, of course – just most things. Because most things don’t matter, and most news stories aren’t worth tracking. “

The hardest thing for anyone connected with Wall Street to say is “I do not know.” The whole business of Wall Street is making a bet based on a guess of the eventual outcome. The S&P 500 will rise by 7.3% over the next 12 months. The interest rate of the ten year Treasury Bond will rise to 3.01% by the end of 2017. IBM (IBM) will earn $13.84 next year. Amazon (AMZN) will grow earnings by 36.08% annually for the next five years. These predictions are all very concise and delivered with a high degree of confidence. They are almost certain to be wrong.

As Mr. Marks points out in his memo “Developments in economies, interest rates, currencies, and markets aren’t the result of scientific processes. The involvement in them of people, with their emotions, foibles, and biases, renders them highly unpredictable. As physicist, Richard Feynman put it, “Imagine how much harder physics would be if electrons had feelings!” It is hard enough to predict what might happen. It is impossible to predict how people will react to what happens.

I read a lot of forecasts and outlook every year to see what folks think of the world. The very best of these is done by Henry McVey and his team in the Global Macro Department at KKR(KKR). While the do make some predictions they also focus on what looks good to them right now and they take great pains to lay out what might happen to derail their expectations. They also outline how to hedge so of the risks in case they are wrong. It is more of an in-depth explanation of current conditions than an accurate forecast, and I find it useful in understanding the world and markets.

Their expectations this year are for rates to rise slowly and equity markets to return in the low single digits. Real assets that produce income are also expected to do well, and they favor opportunistic real estate purchases, and KKR likes MLPs in the energy infrastructure space. Again their decision is based more on pricing right now than any expectations or guesses about what might happen in the economy or the world.

In what I think is the most relevant paragraph of the whole report Mr. McVey writes “Also, as we outlined earlier, many of our models suggest more limited upside to asset class returns than in the recent past. Accordingly, we continue to favor a strategy that takes advantage of idiosyncratic opportunities, particularly those that enjoy better pricing during periods of market dislocations as well as those that harness complexity to their benefit. On the other hand, we continue to shun simplicity and/or areas of the market where we believe recent inflows have been too exuberant, particularly around visibility of earning streams.’

That sounds somewhat Melvinesque in nature. Buy when prices have fallen sharply and avoid those areas of the market everyone loves. The whole report can be found at, and I highly recommend you take the time to read it.

Next week we will have a new President, and the real fun will begin. If you think the journalists, pundits, and whackos on both sides of the aisle have been ridiculous since the election wait until you see what happens when Mr. Trump is in the White House. The fur is going to fly, and I am going to be very interested to see how it all plays out. Melania needs to ground the Prez like I do my youngest but taking his social media accounts away, or he could lose the support of Congress early in this whole thing. While I like some of his ideas on the economy and jobs and am a huge fan of many of his cabinet appointments I fear that he will run into huge problems with the process of governing. This is not the Trump Corporation where his world is law. This is a pretty good chance to remake the regulatory environment and rewrite the mess we call a tax code, so I hope he doesn’t blow it in 140 characters or less.

Turning again to Epictetus in life and equally so in the markets, It's not what happens to you, but how you react to it that matters. We cannot predict tor control what the markets will do, but we can put ourselves in a position to respond to what it does. We currently own some little banks, REITs, discounted closed-end funds and other companies that we purchased at bargain prices. If the market gets carried away and pushes the prices of these assets to silly levels, then we will monetize euphoria by selling them at fantastic prices. We also have a lot of cash, so if price should collapse in the cold gray aftermath of Inauguration Day or some other geopolitical even, then we will be in a position to monetize fear by purchasing quality assets at deep discounts to their underlying value.

In the recreational reading front, I am on the second of 6 of the novels by former Forbes and New York Times business writer Lawrence De Maria featuring tough guy detective Jake Scarne. The main character is a lot like Spenser in the Robert Parker novels with a touch of Travis McGee thrown in for good measure. It is clear that McGee is an influence as in one the scene in the second book a hit man is talking to a woman he met on a plane about the many virtues of reading John D. MacDonald and Travis McGee. So far both books have a financial or real estate backdrop and are easy fund reading. The Kindle versions are bargain price so that naturally appeals to me as well.

Have a great week everyone!


PS- When approaching the markets it pays to take the philosophy advice of the King-who would have turned 79 this week!

Posted to The Community Bank Investor… on Jan 12, 2017 — 4:01 PM
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