Howard Marks on Expert Opinion
01.19.17 01:31 PM
In a week when I have once more gone out on the old limb, in last weekend’s Thoughts from the Frontline, to bring you my forecast for the new year, and when I’m also sharing with readers of my Over My Shoulder service the tea-leaf skryings of some of the boldest and brightest among my fellow economic prognosticators, I’m feeling a need to use today’s Outside the Box to redress the balance a bit.
Thus, I have for you today a piece by legendary investor Howard Marks, co-chairman of Oaktree Capital, in which Howard says not one word about how 2017 may play out, but rather makes a rather convincing case that expert opinion ain’t worth a hill of beans.
(Or perhaps we should say that it ain’t no better than a hill of beans onto which additional beans are being randomly dropped, until we get a bean avalanche, large or small. Longtime readers will have instantly recognized a favorite theme of mine, which we first explored in my letter titled “Fingers of Instability: Ubiquity, Complexity Theory, and Sandpiles,” way back in April, 2006.)
Howard has a beautiful example of the deep worthlessness of expert opinion (especially when that opinion sallies forth into the future); and I got such a kick out of it that I just have to share it up front with you.
Howard shares with us some telling statistics from a full season of the New York Post’s “NFL Bettor’s Guide,” in which each week during football season, the Post’s 11 experts advise its readers as to which teams to bet on. Here’s how these geniuses did over the full 17-week season, covering 256 games:
Whew! OK, then.
And speaking of experts, I would like to extend a hearty welcome to Paul Krugman as he joins us here in the camp of those who are concerned about high deficits and debt. Paul’s January 9 column in the New York Times is entitled (I do kid you not) “Deficits Matter Again.”
I can only assume it was a kind of Saul-of-Tarsus, road-to-Damascus experience that lead Brother Paul to his new faith – after he had persecuted those of us who have resolutely believed that deficits and debt do matter these last eight years, calling us debt-phobes and worse. Having been singled out as such I will readily admit that it has been hard to turn the other cheek. But still, glad to have ya with us, Paul, even if you’re a bit late to the party.
And yes, with conservative Republicans riding into town, ready to grasp the fiscal nettle with both hands, the federal debt and deficit are definitely more important than they have been for a while. But put me decidedly in the camp of Newt Gingrich and Bill Clinton, who together figured out how to control the deficit and actually reduce the debt over time.
Now, a less warm-hearted and understanding person than I might side with the National Review or the many bloggers who have hastened to note that it was only 78 days ago that Mr. Krugman was going on again about deficit scolds and debt-phobes. We must pardon them for concluding that deficits only matter in the World According to Paul Krugman when Republicans control the Congress and presidency. Some of these critics have uncharitably called Paul a has-been economist who has turned to political hacking. Please guys, no name-calling. He has sincerely stated that he wants to join us in the holy war against the demons Debt and Deficit. His conversion must be acclaimed – even though the latter-day Paul may have in common with his biblical namesake that he was once the chief of sinners. (For those who may not have ventured into the New Testament lately, that’s 1 Timothy 1:15.)
Then again, Paul may be suffering from a dire syndrome that I have recently seen to be spreading among the many liberal and progressive commentators in the media. I call it PTESD: Post-Trump Election Stress Disorder. The tell-tale symptoms include emotional outbursts of varying hues and stripes, the need for safe places to cry and mourn, and extreme difficulty in coming to grips with the fact that the world might actually change. Kind of like it did in 2000, 1992, 1980, 1976, 1968, 1960 – well, you get the idea.
And it is very possible that in the year 2021 our Paul may once again revert to his old-time religion under a new Democratic president. So perhaps his critics are right to be dismissive. I have to agree that in his Monday opinion piece, Paul’s economic arguments are just as weak as they were before his conversion; and so the fact that he seems to have arrived at a diametrically different conclusion 78 days on, when the only data point that has changed is that there is now a Trump presidency, is admittedly suspect.
Those suffering from PTESD seem to believe that the US presidency is imbued with all sorts of powers, some bordering on the miraculous and heretofore unseen, and that President Trump is liable to change everything overnight. The problem with that viewpoint – and this should give the sufferers considerable comfort – is that there is this pesky thing called Congress that has its own ideas as how the magic wand should be waved, and in whose direction. I somehow think it’s going to take more than a little bit of fairy dust to actually drain Foggy Bottom.
Sorry for the digression, but I find this whole business quite humorous. I will be in Washington DC next week for the inaugural, and I’m hoping to be able to interview on camera a number of Washington decision makers, to try to get at some of the real economic questions that will affect our businesses and portfolios this year and in years to come. I want to thank my good friend Monty Bennett, CEO of the Ashford Group of Companies, who moved heaven and earth to find my production team some rooms closer in than 40 miles.
You have a great week. This weekend, for better or worse, we’ll be checking out what some of my daring friends are forecasting for 2017. And hopefully I’ll get the letter to you a little earlier this week.
Your worried that I’m having too much fun analyst,
(I mean, seriously, I am working my tail off but having so much fun that I have to resist looking over my shoulder to see if anything is catching up!)
John Mauldin, Editor
Outside the Box
By Howard Marks
January 10, 2017
Originally published here
In August, I mentioned that I had chosen the title “Political Reality” for my memo in part because of my liking for oxymorons. I classed that title with other internally contradictory statements, such as “jumbo shrimp” and “common sense.” Now I’m going to discuss one more: “expert opinion.”
This memo was inspired by a thought that popped into my head when the outcome of the election settled in. You may point out that at the end of my November 14 memo “Go Figure!,” I said I wouldn’t write any more about politics. True, but I didn’t say I wouldn’t think about politics. Anyway, this memo isn’t about politics, it’s about opinions.
Last spring I attended a dinner where one of Hillary Clinton’s senior advisers was soliciting input, as she and her campaign were struggling to come up with an effective counter to Bernie Sanders’s populist message. Most of those present expressed frustration on the subject, until an experienced, connected Democrat assured everyone, “Don’t worry. She’ll win. The math is irresistible.” The Hillary supporters were relieved, and he turned out to be right: she won the nomination going away.
In late October, with the issue of Clinton’s private email server and the FBI’s new investigation further dogging her, that same seasoned Democrat was asked whether the election was in jeopardy. “Don’t worry,” he said. “She’ll win. The math is irresistible.” We all know the result.
The opinions of experts concerning the future are accorded great weight . . . but they’re still just opinions. Experts may be right more often than the rest of us, but they’re unlikely to be right all the time, or anything close to it. This year’s election season gave us plenty of opportunities to see expert opinion in action. I’ll start this memo by reflecting on them.
The Year Polls Stopped Working
Pollsters got off to a tough start last year with the June referendum concerning Britain’s membership in the European Union. Right up to the end, both pollsters and bookmakers considered U.K. citizens 70% likely to vote to remain a member. But, in the end, “Leave” won by a few percent.
The reaction was shock. Voters on both sides of the issue were unprepared for the outcome. Within a day or two, the leaders of Britain’s main political parties had stepped down. People began to seriously discuss what that outcome meant and how “Brexit” would be accomplished.
The explanations for the pollsters’ error centered around Britain’s lower level of experience with, and expertise in, polling. It couldn’t happen in the U.S. In fact, in the 2008 and 2012 presidential elections, Nate Silver, the proprietor of website FiveThirtyEight, correctly predicted the outcome in all 50 states once and in 49 the other time.
In 2016, FiveThirtyEight estimated the odds of Hillary Clinton winning as slightly better than 50/50 as of the end of the Republican convention in July. Then it had her as an 8-to-1 favorite in August, when the Democrats concluded their convention and Donald Trump’s perceived missteps peaked. And then it again said she was slightly ahead just before the first presidential debate on September 26. It never made her out to be an underdog. And on election day, it estimated that she was 71.4% likely to win.* Most other pollsters put her chances of winning at between 80% and 99%, and only one considered Trump the favorite.
In the end, of course, Trump won in the Electoral College by a final count of 304 to 227, despite losing the popular vote by almost 2.9 million votes, or about 2%. In particular, he won in a number of “swing states,” such as Pennsylvania, Michigan and Wisconsin, where the polls had him well behind. So much for experts’ forecasts.
Finally, rounding out the pollsters’ failures in 2016, the reform referendum that Italy’s Prime Minister Matteo Renzi bet his career on – which had been considered 3% behind – lost by 20%. The outcome wasn’t a surprise, but the margin certainly was.
No one really knows why polling failed so miserably last year. Clearly there was a groundswell of populist, anti-establishment and anti-insider sentiment, but shouldn’t it have been detected? In particular, Trump did much better than predicted (or much less badly) with a number of important groups, such as Hispanics and college-educated women.
For some reason, in 2016 pollsters in all three countries either failed to talk to a representative sample of voters, failed to elicit honest responses, or failed to accurately interpret the data. Thus their opinions may be accorded less weight in the future.
So Much for the Experts
I’m struck by how dramatically opinion can flip-flop:
Think back to just before last week’s election. What did we know?
Of course there are no “facts” regarding most future events, just opinions. Experts – especially people who are paid to be experts – often couch their statements as facts, but that doesn’t mean they’re sure to come true.
And the Media?
When I was young, a limited number of media outlets were the public’s primary source of information. There were three TV networks and four local stations – no more room on the dial – and until 1987 they were subject to the FCC’s Fairness Doctrine that required broadcasters to discuss controversial matters of public interest and air contrasting views. Edward R. Murrow, a TV news anchor, was one of America’s most respected men, and I often make reference to the time he said, “Anyone who isn’t confused doesn’t really understand the situation.” Walter Cronkite, Chet Huntley and David Brinkley were similarly trusted. Newspapers may have had Democratic or Republican leanings, but outside the editorial pages they largely avoided partisanship in covering events.
The subsequent proliferation of cable TV networks set off powerful competition for viewers. A few chose to be full-time purveyors of news, along with some talk-radio stations. Rush Limbaugh, Roger Ailes and Rupert Murdoch realized that a big following – and big money – could result from highly partisan, even inflammatory, broadcasting. Radio “shock jocks” like Don Imus and Howard Stern chipped away at standards for language and demeanor, and news and talk shows emulated them. So now we have outspoken, boisterous speech, along with highly partisan messaging.
These days the news media shows little resemblance to what it was 30, 40 or 50 years ago. Many outlets are highly biased to one side or the other and make it possible to read, watch and listen all day and never be exposed to all aspects of the issues. Thus most people find something to complain about in the media coverage of the 2016 presidential election.
Today’s media personalities rarely express the confusion Murrow did. Rather, they tend to state forecasts as certainties. When do you hear a TV commentator say “I think” or “it seems to me”?
In fact, they often remind me of the description of economists I heard in the 1970s: “portfolio managers who never mark to market.” That is, they find it easy to overlook the times when they’re wrong. In August or September of 2015, when Donald Trump was beginning to achieve success in his pursuit of the Republican nomination, a New York Times columnist flatly stated that because Trump couldn’t stand the prospect of losing, he would drop out of the race before the primaries began in January. We didn’t see that happen . . . or any further mention of his assertion.
What to Do About the Media
Given the nature of the candidates for the presidency, the starkness of the choice, and the recent trends in media coverage, I spent a great deal of time last year following political developments via websites, newspapers and television coverage. Most people I know did, and you may have as well. For many it became a preoccupation, even a mania.
My son Andrew has helped me dope out the media effects:
For a number of reasons, there has arisen in the media:
. . . a system that needs more and more eyeballs for longer periods of time while gutting high-quality, reliable sources of information. We have more “news” but less original reporting than ever before, an order of magnitude more in the way of opinion and analysis, but as [author and academic] Tom Nichols has pointed out, somehow less expertise.
Chuck Klosterman [a writer on American culture] once remarked at how strange it was to walk through the front offices of a football team and find that everyone there was watching ESPN. Didn’t they have better information than the average viewer or reporter? Turns out, no – they’re addicted to the same media we are and subject to the same groupthink. . . .
Twitter isn’t designed to help you get in and out with the best information as quickly as possible – it’s supposed to suck you into either a contentious world of argument and debate or an echo chamber that reassures you everyone thinks like you do. . . .
We’re “participating” in the ecosystem because it’s addicting and because we’re curious.
So author Holiday came up with a useful prescription in response:
It’s not that I am going underground or completely disconnecting from current events. It’s that I have decided I am no longer going to watch them develop in real time. I’m going to watch the Saints play every Sunday, [but] I’m not going to fool myself into thinking that tuning into “Sports Center” on Tuesday will help.
A lot of people’s lives would be more tranquil and more productive if they accepted that what the media says about an upcoming event – and whether you watch or not – won’t have any impact on the outcome.
What Do the Experts Know?
One of the reasons I crafted this memo this way is so I would have a chance to return to a subject I introduced in 2015: the New York Post’s “NFL Bettor’s Guide.” Each week during football season, the Post’s eleven experts advise its readers as to which teams to bet on. Here’s how the experts did over the full 17-week season, covering 256 games:
The Importance of the Macro
Interest in “macro” has amped up meaningfully over the last dozen years or so. I think it largely started with the increased activism on the part of the Greenspan Fed, and investors’ heightened interest in it. Today many analysts seem preoccupied with central bank behavior, government actions, trends in interest rates and currencies, and the movement of markets, as opposed to the fortunes of individual companies.
These things are almost all we hear about. And most people think knowledge regarding the outlook for them holds the key to investment success. Thus I want to make this a major topic here.
Since I speak a lot to clients, prospects, CFA societies and student groups, I get a lot of chances to hear what’s on people’s minds. And usually they focus on a relatively small number of questions. Over the last few years, the ones I’ve gotten most often have been these:
Ever since then, people have been preoccupied with when interest rate increases would take place, and that’s the question I’ve been asked most often. My response has been consistent: How would I know, and why do you care?
First, how would I know? I always point out that I’m not an economist or Fed watcher. And I don’t think economists or Fed watchers know the answer, either. No one consistently knows the timing of these things in advance, in particular because the Fed itself probably doesn’t know.
But more importantly, why would anyone care? If I say December, I ask them, what actions would you take? And if I changed that to March, would you do something different? The idea that you would do something different with a March expectation rather than a December expectation ignores the likelihood that the expectation of a March rate rise would begin to be reflected in asset prices well before March. That means the likely date of a rate rise is not a very useful piece of information.
What could go wrong? – For years it has felt to most people that we’ve been in a Goldilocks environment: neither too hot nor too cold. The economy hasn’t grown slowly enough to cause recession or deflation, or fast enough to bring on hyperinflation and the need for restrictive action. The markets have been strong enough to bode well, but not so strong as to suggest a bubble. Ditto for investor psychology.
Most people don’t want to tempt fate by saying things will go well forever, and in fact they know they won’t. It’s just that they can’t decide what it is that will go wrong. The truth is that while I can enumerate them, the obvious candidates (changes in oil prices, interest rates, exchange rates, etc.) are likely to already be anticipated and largely priced in. It’s the surprises no one can anticipate that would move markets most if they were to happen. But (a) most people can’t imagine them and (b) most of the time they don’t happen. That’s why they’re called surprises.
So I can guess at “improbable disasters” like acts of war, disinflation or a sudden seizing up of the economy, but they’re unlikely to happen, and I don’t know much more about them than anyone else. The greatest single influence of the last three years was doubtless the 75% decline in the price of oil from June 2014 to February 2016. But who predicted it?
In my memo “It’s All Good” (July 2007), on the doorstep of the financial crisis, I insisted that the good times couldn’t roll on forever. But I didn’t know it was sub-prime mortgages that would be the catalyst for a turn for the worst, and when I listed my candidates, I ended with “the things I haven’t thought of.” That’s still about the best I can do . . . or most others, it seems.
What inning are we in? – Perhaps no one can say just what it is that will ring the bell on today’s positive trends, but people still want to know how advanced we are in the process, and thus when it will come to an end. People began to ask me what inning we’re in during the financial crisis of 2008, and they’ve continued ever since.
First of all – admittedly I’m being picky here – people rarely specify which game they’re asking about. Is it the economic recovery, the credit expansion, the string of low-default years, the upswing in investor psychology, or the stock market rise? Certainly the answer could be different for each.
But, more importantly, the question assumes we know how long each game will go on. A standard baseball game consists of nine innings, so “second inning,” “sixth” or “ninth” has a clear meaning. But with the things we’re wondering about here, we never know how long the game will run.
So rather than “what inning,” I’d suggest investors ask whether things are or are not in an extended state. Is psychology depressed, average or euphoric? Is the capital market shut tight, normal or unthinkingly generous? These are questions that can be answered in a helpful way, not how close the game is to being over. No one knows the answer to the latter.
What’s the outlook for country xyz? – The bottom line for me here is that people tend to confuse general intelligence, good investment records, expertise in specific areas, and all-around insight. Thus I’ll reiterate that I’m no economist (and even if I were, my chances of being right would be limited). And then I’ll add that being experienced as an investor and even hopefully intelligent says nothing about being able to divine a specific country’s macro potential.
After I spend a day or two in a country, people often ask for my conclusions. But in the course of my visits, I generally (a) visit only big cities, (b) meet only with financial types, and (c) spend more time answering questions than gathering information. In fact, on one recent visit I responded to the usual question by telling my audience that I hoped each member knew more about their country than I did. I sometimes gain visceral impressions of the countries I visit, but they’re usually data-lite and likely to come true only in the longest run, if at all.
Implications of the Election
Of course, the U.S. presidential election was the biggest story of 2016, and it brought me endless questions. Who would win? I’d read the same polls as everyone else, lived on the coasts, and reached the same conclusions. I could bring no unique insight on the basis of which to question the likelihood of a Clinton victory.
How would the two candidates differ as president? It didn’t take any brilliance to conclude that a Clinton administration would be quite predictable and operate within rather narrow boundaries, while anything was possible from a Trump presidency – in some cases better than a Clinton one, but also with considerable potential for worse.
I was in Australia on Election Day and just after, and questions about the implications started immediately. In fact, they’re what inspired me to write “Go Figure!” over the following weekend in Seoul. In it, I described the following questions as being open:
Of course, only nine weeks have elapsed since the election. Any expert who tells you what’s in store from the Trump administration – or from Britain’s departure from the EU; Italy without reform and Renzi; the Indian economy with 85% of its currency cancelled (the highest-denomination notes, 500 and 1000 rupees, were declared no longer legal tender in order to rein in corruption and the underground economy); or the coming elections in France and Germany – is talking through his hat.
My Opinion of Opinions
Since I’ve discussed these things at great length over the years, I‘ll try here to sum up succinctly:
Now forces like technological developments, disruption, demographic change, political instability and media trends give rise to an ever-changing environment, as well as to cycles that no longer necessarily resemble those of the past. That makes the job of those who dare to predict the macro more challenging than ever.
What about Facts?
While I take a dim view of forecasts, and especially of opinions presented as facts, I do believe there are such things as facts. Unfortunately, however, the concept of “facts” is among the casualties of the increasingly partisan environment. Recently we have seen both the elevation in status of “non-facts,” as well as the tearing down of “real facts.”
“Fake news” emerged as a significant issue in 2016. Some people believe it influenced the election. Ease of access to social media makes it quite simple to create and disseminate statements that others will believe, even if they’re total fabrications. The pizzeria fronting for a child-abuse ring led by Hillary Clinton is just one of 2016’s wilder examples. I expect to see continuing discussion of the proper role of social media in taking down untrue posts, and of the conflict between defending freedom of expression and preventing the publication of falsehoods.
At the same time, I’m concerned about the disappearance of real facts. Nowadays it seems almost anything can be characterized as questionable. There’s broad agreement among scientists that humans play a significant role in climate change – as there is among sitting world leaders – and yet we hear this idea dismissed as “a matter of opinion.” The other day I heard a former U.S. Senator who now leads a policy think tank describe as “fake news” a Congressional Budget Office report with which his organization takes issue. If the non-partisan CBO isn’t accepted as objective and truthful, who will be?
In a time of raging partisanship, disrespect for experts, and drastically debased standards for discourse, is there such a thing as a fact? Can there be no distinction between opinion, fact and fake fact? Can there be a figure everyone trusts, another Edward R. Murrow? Can any statement be safe from disparagement even though it’s not 100% measurable and provable? Is history subject to unlimited revision if there are no video images? What will our grandchildren be taught is the meaning of the word “true”? What authorities will they trust? We certainly live in interesting times.
Macro Investor Performance
The acid test of an investment strategy is whether it produces good results. So here we are: first, “everyone knows” macro is a key determinant of investor performance these days, and second, there have been a lot of significant macro developments of late, providing opportunities for those with foresight to apply their predictive powers. Thus the ingredients have been in place for significant gains on the part of macro-oriented investors.
Let’s take a look at the results for two Hedge Fund Research macro fund indices and compare them against the HFR index of all hedge funds:
Periods ended November 30, 2016
Annualized Net Returns 1 year 3 years 5 years
HFRI Macro (Total) Index ( 1.17%) 1.64% 0.74%
HFRI Macro: Discretionary Thematic Index* ( 1.96) ( 0.47) 0.35
HFRI Fund Weighted Composite Index 3.37 2.46 4.23
* Macro funds run by individuals, not algorithms
While the average hedge fund’s return has been puny, I think it’s fair to say the average macro fund’s return has been seriously deficient. In fact, the average macro fund’s net return may not have been statistically different from zero. Thus, based on the indices, it’s hard to say managers paid to profit from macro developments have done so.
The Last Word
To close, I’ll weave together a few recent inputs:
First, I had dinner with Warren Buffett about a year ago, and he pointed out that for a piece of information to be worth pursuing, it should be important, and it should be knowable. These days, investors are clamoring more than ever for insights regarding the macro future, because it’s important: it moves markets. But there’s a hitch: Warren and I both consider these things largely unknowable. He rarely bases his investment actions on them, and neither does Oaktree.
Second, I want to include a final paragraph from the Observer article about the media that I mentioned earlier. I think it’s golden:
“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. (Emphasis added)
Finally, I want to describe a great phone call I received this past spring, from a sell-side economist I worked with in the early ’70s and have stayed in touch with since. “You’ve changed my life,” he said. “I’ve stopped making forecasts. I study data and report on my inferences. But I no longer express opinions about the future.” Mission accomplished.
January 10, 2017
Bonus section: I’ve been collecting (and recycling) quotations for almost forty years, more of them concerning forecasts than anything else. Here are five of the very best. Together they say virtually everything that has to be said on the subject:
We have two classes of forecasters: Those who don’t know – and those who don’t know they don’t know.
– John Kenneth Galbraith
No amount of sophistication is going to allay the fact that all of your knowledge is about the past and all your decisions are about the future.
– Ian Wilson (former GE executive)
Forecasts create the mirage that the future is knowable.
– Peter Bernstein
Forecasts usually tell us more of the forecaster than of the future.
– Warren Buffett
I never think of the future – it comes soon enough.
– Albert Einstein
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