Blackrock CEO, Larry Fink tells the story of a dinner he had with the manager of one of the world’s largest Sovereign Wealth funds. The fund’s objectives, the manager said, were generational.
“So how do you measure performance?” Fink asked.
“Quarterly.” replied the manager.
We invest your capital for multiple years and often decades. Sometimes your objectives, like a Sovereign Wealth fund are generational.
Unfortunately we live in a world that produces more data than any one person can take in. Despite the claims of many commentators that this is making us more informed, it is actually making us collectively stupider.
In response to the tsunami of information we are becoming more partisan and divided, starting with our opinion and working backwards from that point to finds all the information that confirms that view. We explored this a bit in our Quarter 4 investment round-up blog. We also looked at how poor commentators can be at predicting the future (January is a good time to find these) and further fun was to be had recently with Jeremy Grantham’s latest prediction of a bubble. What the journalist doesn’t tell you is that he has been predicting this every year since 2013. Like a stopped clock he will be right eventually, but anyone following his advice would have missed out on doubling their money.
We aren’t immune from this slew of data either; we receive multiple data points and economic views into our collective inbox every day. One active manager in particular, e-mails us weekly with a very long and well written piece, about markets and the economy. You wonder how he finds the time to manage his funds but more importantly whether a weekly view of the world is the appropriate one to be taking. We try to ignore all of this ‘noise’ because one week the view is that China is about to tank the world economy and the next week that they are boosting the world economy by cutting domestic interest rates. We see this trend in politics also, when creating headlines take precedent over creating policy.
So this information flow has two negative effects; short-termism and confirmation bias.
“There is an old tool that has become very handy that is called strategic patience, which is do not react in the short-term. Take your time. See what is the underlying, real message. And then, once the reality is represented by actions, then decide how you are going to react to those actions.”
– Ildefonso Guajardo Villarreal, Secretary of Economy, Mexico.
This can be combatted by ignoring the short-term news and information but it can also be helped by focussing on long-term trends. To do this last year, we read ‘The Next 500 years’ by Christopher Mason and ‘The Precipice’ by Toby Ord. Both look at the long-term existential risks and opportunities that humanity face and are a really good antidote to short-term obsessiveness. Climate change is a classic example of an existential risk that we face that is moving too slowly to make the evening news, a point very neatly satirised here. Our work with the Altor Foundation has also led us to the work of Effective Altruism which is an organisation focussed on researching the most impactful projects to support with charitable money. One part of their work is to look at the most impactful existential global risks (impact x likelihood of happening) and this sobering work (the answer is a super-volcano) can be found here. It isn’t all depressing news though and we summarised some of the positive highlights in our Blog here.
“When people flirt with despair about the future, they are less
likely to take the actions necessary to safeguard it,
focussing instead on the short-term.”– Al Gore
One issue is that, as we make more money we reset our ‘Baseline’ expectation. The last decade plus has seen year on year double digit growth but small losses feel painful because we have adjusted our baseline return expectation. Ever rising Baseline expectations might be why the American public have been telling Gallup every year for the last 40 years that they are not happy with the way the country is going (average 63% of respondents each year). This against a back drop of the fastest growth in living standards and technological advances.
As we have said before, if you can find your purpose in life and fit your money to your purpose, then making money becomes a secondary consideration. Perhaps a little less time focussed on your money and a little more on what matters in life is the only key to success.
If you have time, check out Matt our Managing Partner, talking to one of the leading lights of the financial planning and investment profession. It is an industry style conversation but has gone down well with non-professionals. It also covers some of the positive change that we are trying to drive in our profession and neatly summarises our approach. You can find the website here, with links to the audio and video version.