“When you have something that you know is true, even over the long term, you can afford to put a lot of energy into it.” – Jeff Bezos, Amazon founder
Amazon founder Jeff Bezos was often asked what’s going to change in the future. Bezos cringed at the question. How the heck can anyone know what the future would look like?
“I almost never get asked, what’s NOT going to change in the next 10 years? This question is actually the more important of the two because you can build a business strategy around the things that are stable in time.”
For example, are Amazon customers going to get sick of paying low prices and getting their stuff the same day? Probably not.
We can use this idea of inverting complex problems (the idea of inverting came from Charlie Munger, “invert, always invert”) to highlight what’s NOT going to change for the investor over the next 10 years.
Human Need for Certainty
It’s been said the most dangerous trait for investors is to seek certainty. Humans have a strong tendency to seek patterns and explanations, even in inherently complex systems like financial markets.
Market forecasts, even if wrong, provide a sense of certainty that investors find comforting. In our opinion, most investors know predictions are fleeting (and usually wrong), but we just can’t help ourselves seek the illusion of control.
Scams
The old saying, “if it’s too good to be true, it probably is,” has stood the test of time. The TV show “American Greed” is a perfect example.
Most every scam goes something like this…
The scammer promises lofty, guaranteed returns.
Unsophisticated investors take the bait and lose everything.
The above example is overly simplistic, but most every scam is rooted in the promise of guaranteed returns and/or quick riches.
Human Fear & Greed
From Morgan Housel’s book, “Same as Ever,”…
“Predicting what the world will look like fifty years from now is impossible. But predicting that people will still respond to greed, fear, opportunity, exploitation, risk, uncertainty, tribal affiliations, and social persuasion in the same way is a bet I’d take.”
When markets are racing higher, investors typically will crowd into popular trades, seek risk, and chase returns.
When markets are beaten down, investors typically shun risk, rush to sell, and miss the bounce back.
No one knows what market will do in the short-term, but if you recognize these predictable patterns of human behavior, it could help you avoid emotional extremes.
Appetite for Doom & Gloom
The mainstream media, social media influencers, and folks selling newsletters have figured out stories that elicit fear, anger, and disgust sell.
Positive scenarios delivered by optimists are shrugged off as aloof and mundane.
Negative scenarios delivered by pessimists are given a microphone.
Morgan Housel said it best, “Tell someone that everything will be ok, and they’ll shrug you off. Tell someone they’re in danger and they’ll hang on your every word.”
Recency Bias
Recency bias causes individuals to place disproportionate weight on recent events or information when making decisions, while ignoring historical data and long-term trends. This leads people to overemphasize the importance of the most recent occurrences and project them into the future.
An investor with recency bias might say, “tech stocks have been the best performers the past few years, I’m just going to buy those from now on.”
Randomness
When it comes to financial markets, the only certainty is uncertainty.
With roughly 8 billion people in the world, we can’t pretend to know how things play out.
Something can be likely and not happen. Something can be a longshot and happen.
In my experience, the stuff people worry about is inherently less risky because it’s a known peril. The stuff people aren’t talking about is what derails markets (think COVID, Yen Carry Trade, Q1 2023 banking crisis).
Investors would do well to think in probabilities, be able to change one’s mind, and not be surprised by surprises.
Dysfunction of Government
I hate to be cynical, but does anyone think our government can solve real problems?
The U.S. government runs an annual $2 trillion dollar deficit every year, with the national debt ballooning over the past decade. Yet, no one talks about fixing the issue.
Partisan gridlock, lack of accountability among elected officials, and the widening divide between the political establishment and average citizens have all contributed to an erosion of confidence.
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In my opinion, investors would do well to ignore impossible to predict short-term market events. By focusing on what you think is NOT going to change over the long-term, we can create a framework for making better investment decisions regardless of what happens next.