That’s the way everything looks in hindsight. When we look at a chart of the stock market in the late ‘90s, it’s “obvious” that tech stocks were in a bubble and that everything was overpriced. When we look at early 2009, it’s “obvious” that everything was on sale, and that great companies were on sale. When you look at the past year, it’s “obvious” that the market had lost momentum and was due for a significant correction. Isn’t it?
But that’s looking backwards with the benefit of our experience. We know how things turned out, so the path seems self-evident. In reality, the path is never clear. In the ‘90s we didn’t know if revolutions in technology would continue to make us more productive and permanently boost economic growth. During the Financial Crisis we didn’t know how bad thigs really were inside the banks’ balance sheets, and whether the government was going to have to nationalize a third of the market to keep the economy going. Today, we don’t know if China’s economy will stabilize, or if market volatility will cause consumers to pull back—pulling everything down with them.
Investing isn’t like driving cross-country. We don’t have signs with big arrows telling us which way to turn. The future only exists as a range of possible outcomes, with some developments more likely, and some less likely. And sometimes freakish, once-in-a-lifetime things happen—black swans, or white swans—that change everything.
In Arabic, there’s a word that describes a deterministic worldview: “maktub”—“it is written.” It means that the outcome has already been decreed and recorded. But investors have to look at the world probabilistically. Nothing is obvious. If the future is written, it’s written in invisible ink.
Douglas R. Tengdin, CFA
Chief Investment Officer