Certainty vs. Growth

“After 28 years at this post, and 22 years before this in money management, I can sum up whatever wisdom I have accumulated this way: The trick is not to be the hottest stock-picker, the winning forecaster, or the developer of the neatest model; such victories are transient. The trick is to survive. Performing that trick requires a strong stomach for being wrong, because we are all going to be wrong more often than we expect. The future is not ours to know. But it helps to know that being wrong is inevitable and normal, not some terrible tragedy, not some awful failing in reasoning, not even bad luck in most instances. Being wrong comes with the franchise of an activity whose outcome depends on an unknown future (maybe the real trick is persuading clients of that inexorable truth). Look around at the long-term survivors at this business and think of the much larger number of colorful characters who were once in the headlines, but who have since disappeared from the scene.”

. . . Peter Bernstein, author, historian, economist (2001)

Looking around, we don’t see many people who used to be in this business. Maybe they just couldn’t take being wrong. Or, maybe their clients couldn’t take their claiming they were always right. Or, maybe they got tired of issuing lots of predictions while, at the same time, watching the stock market going nowhere this year. One of the things my father drilled into my head goes like this:

"Son, if you think the stock market is going up, be bullish. If you think it is going down, be bearish. But for gosh sakes, make a 'call', because there are too many people in this business that talk out of both sides of their mouths so that, no matter what the market does, they can say, 'See, I told you that was going to happen.' And, if you make 'calls', you are going to be wrong. The real trick for a successful investor, or trader, is to be wrong quickly for a de minimis loss of capital."

Being wrong and admitting it is a good strategy, yet very few pundits on Wall Street actually admit to being wrong. To that point, we did not see the current decline coming, and neither did our models. If fact, the models continue to favor the upside with a full charge of internal energy. This is probably because the recent pullback came on surprise news and not weakening fundamentals. As we wrote late last week:

"The preopening futures are sharply lower as the arrest of Huawei’s CFO in Canada has added to uncertainty on U.S./China trade talks, while oil is down sharply due to OPEC disappointment. Huawei is a giant Chinese telecom company, and its CFO, Meng Wanzhou, was arrested in Canada. How she could be arrested on December 1, and we are not told about it until 12-5-18, is a mystery to us, but there you have it. Indeed, they don’t call them surprises because you expect them, and yesterday’s CFO arrest was a total surprise! How it is going to effect the trade negations is a mystery, but obviously the equity markets think it is going to be impactful."