Reading across disciplines is one of the best ways to improve our investment acumen. Here is a summary of some of the best articles I read this week. If you like this collection, consider forwarding it to someone who you think will appreciate it.
1. Market prediction is a worthless exercise
I don’t have an outlook on the market as I think it is more useful to try and understand what is going on than to try to predict what is going to happen. The future is about probabilities and the current situation is about facts and interpretations. No one has privileged access to the future and market forecasts tend to be about as accurate as calling a coin toss. There are, of course, analogies that can be drawn about how the current environment maps onto previous historical data, but success in that depends crucially on how the future will, in fact, resemble the past, and whether the cited analogies turn out to be the governing ones. The record seems to show that sometimes they will and sometimes they won’t and we are back at the coin toss.
I recall George Soros saying in 2008 that he had predicted that financial crisis. He then wryly noted that he had predicted many financial crises over his career that never materialized.
A recent study of inflation forecasts by economists, consumers, and the bond market found no significant ability to make value added predictions. “As far as major shifts in inflation go, we are all in the dark, just as we are essentially clueless about where the stock market is heading or the price of oil in 2022, or the date of the next recession".
2. Reducing carbon footprint by burning wood!!
In 2009, the European Union (EU) pledged to curb greenhouse gas emissions, urging its member states to shift from fossil fuels to renewables. In its Renewable Energy Directive (RED), the EU classified biomass as a renewable energy source — on par with wind and solar power. As a result, the directive prompted state governments to incentivize energy providers to burn biomass instead of coal — and drove up demand for wood.
Earlier this year, the EU was celebrated in headlines across the world when renewable energy surpassed the use of fossil fuels on the continent for the first time in history. The EU directive that encouraged the pivot to biomass also left a loophole — it did not prevent the leveling of rooted trees for wood pellet production.
“I can’t think of anything that harms nature more than cutting down trees and burning them,” said William Moomaw, professor emeritus of international environmental policy at Tufts University.
Yet by burning wood, European power plants can reduce their carbon footprint — at least on paper.
3. A little inefficiency is efficient!
So many people strive for efficient lives, where no hour is wasted. But an overlooked skill that doesn’t get enough attention is the idea that wasting time can be a great thing.
Psychologist Amos Tversky once said “the secret to doing good research is always to be a little underemployed. You waste years by not being able to waste hours.” A successful person purposely leaving gaps of free time on their schedule to do nothing in particular can feel inefficient. And it is, so not many people do it. But Tversky’s point is that if your job is to be creative and think through a tough problem, then time spent wandering around a park or aimlessly lounging on a couch might be your most valuable hours. A little inefficiency is wonderful.
Same in investing. Cash is an inefficient drag during bull markets and as valuable as oxygen during bear markets, either because you need it to survive a recession or because it’s the raw material of opportunity. Leverage is the most efficient way to maximize your balance sheet, and the easiest way to lose everything. Concentration is the best way to maximize returns, but diversification is the best way to increase the odds of owning a company capable of delivering returns. On and on, if you’re honest with yourself you’ll see that a little inefficiency is the ideal spot to be in.
Just like evolution, the key is realizing that the more perfect you try to become the more vulnerable you generally are.
4. Just because you are rich, doesn't mean you are intelligent :-)
Wealth might be a sign of good decisions, but can those decisions be repeated? And do good decisions in one field translate to wisdom in other areas of life? Maybe, maybe not – that’s the best we can say. And there are times where exceptional wealth can prevent empathizing with ordinary people, making insight more precarious.
The big blowups in any field aren’t typically caused by a lack of smarts. The catastrophes are typically caused by extreme intelligence that causes people to believe their own dangerous stories – that you can predict with accuracy, use leverage because your prediction must be true, and ignore warning signs that would have been obvious to a normal person who’s less adept at mental gymnastics.
5. The willpower paradox: when confident self-talk becomes counterproductive
The researchers wanted to understand the relationship between intention, motivation, and actual goal completion. In their own words: “How does the way in which you talk to yourself shape your future actions? What if asking yourself a question about your potential behavior increased the likelihood of that behavior?”
By switching from declarative self-talk to interrogative self-talk, you will consider whether you really want to start that diet, or if you really want that promotion. If the answer is yes and you start working towards these goals, you are more likely to succeed as you will be driven by intrinsic motivation.
Next time you want to set a new goal, keep an open mind and ask yourself: “Will I?” As strange as it may feel, treating the future as an open question will increase your intrinsic motivation and thus your chances of achieving your goals.
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