2020 Investment Outlook

2020 Outlook mast

Linked below is my (Ninth Annual) 2020 Investment Outlook. I trust you will find it useful. Make sure you have at least a cup of coffee, maybe a stiff drink. It’s a monster.

2020 Investment Outlook

Forecasting Follies 2020

Note: A version hereof will appear in my ninth annual Investment Outlook. Watch this space.

2020 Outlook 01

We are all natural-born and equal opportunity extremists who want to live in exceptional times. That is why, for example, in the financial world, we regularly overpay both for insurance and for lottery tickets (literal and figurative). We are pulled toward extremism by our inherent biases, including tribalism, herding, excessive certainty, and overconfidence. The problems caused by these biases are compounded by our ideological nature, our propensity for confirming what we already believe, and our general inability to see that which disconfirms it. The sad truth is that none of us is as good as we think we are. We postulate apocalyptic conclusions irrespective of whether there is good support for them.

Evidence of this obsession abounds. Continue reading

Not Stupid Wins

As a kid, among my first sports memories is coming home from church to see Jim Brown running roughshod over the rest of the NFL.

Brown was only the sixth pick in the 1957 draft, which means that five teams passed on the greatest player of all-time (in two different sports). There have been many bigger draft misses. For example, Tom Brady was the 199th pick of the 2000 draft, selected after the likes of quarterbacks Giovanni Carmazzi, Chris Redman, and Spergon Wynn, drafted by the Browns.

Of course, Spergon is far from the Browns’ worst QB draft disaster. The failed quarterbacks taken by the Browns in the first round alone is a long list (* number one overall): Harry Agganis, *Bobby Garrett, Mike Phipps, *Tim Couch, Brady Quinn, Brandon Weeden, and Johnny Manziel. The most recent top (overall) pick, Baker Mayfield, remains promising, but there are no first-round successes to date.

Spoiler alert: Drafting NFL players is wildly difficult and inexact.

The Browns are likely to pick in the middle of the upcoming 2020 draft, perhaps 14th. Suppose you are the GM of the Browns and you’re preparing for the draft and you own that 14th pick. You look at a player the scouting consensus says is the 24th best player and think he’s better than that — perhaps the 4th best player. By contrast, the NFL consensus on another player is that he’s the 14th best player but you think he’s only the 28th best. If you’re right about these players, what does that gain you when the draft is held? Continue reading

Black Monday

1987 CrashIt was on a Monday, almost exactly 32 years ago, that the stock market suffered its worst day ever. I was still practicing law then, and I was working in my firm office. As the news filtered out (somebody had been out and heard the news on a car radio), the attorneys began to talk about what was going on. As the day progressed and the news got worse, we talked less and less. A senior partner brought out a tiny black and white television to watch the network news coverage, which had broken in to the day’s typical programming of reruns, game shows, and soap operas. We huddled around it and watched.

It was Black Monday: October 19, 1987. Coverage by The Wall Street Journal the next day began simply and powerfully. “The stock market crashed yesterday.” Continue reading

Getting Better All the Time

The Slate advice columnist, Dear Prudence, received the following sad, poignant, and probably futile letter, desperately seeking help.

“I keep making terrible decisions and can’t seem to stop.

“Last year I left my home, my family, my friends, a 20-year secure (if uninspired) career, to move 2,000 miles away to be with my first love. I’m 50 and I was his first love as well. He’s married and his wife invited me to their home. We decided to share him, although his wife and I were not interested in one another like that.

“My job here fell through. My dog died. The romance flopped spectacularly. I still love him desperately. And when he told me that it was over and that he didn’t love me and never had, I begged him to reconsider, only to have his wife come in and start screaming at me to keep my f***ing hands off her f***ing husband.

“I snapped. I tried to kill myself. I ended up in a coma and then went to the psych ward. I have been out for only a week. I’m back at work. I’m freshly diagnosed as Bipolar I. I’m on new meds I don’t think are helping. Of course, I had to move out and I’m living a very lonely life. I do not feel stable and I cry for hours every night. The loneliness is killing me. I have psychiatric follow-up and intend to do what I can to survive and thrive.

“My former boyfriend is now making noises about wanting to be ‘friends with benefits’ with me once I am ‘well again,’ which sounds more like he wants a self-supporting mistress that he can come and have sex with and then leave at will. I still love him but I realize this is a gross affront to my worth as a human being. I just don’t trust myself to say ‘no.’ Counselling may help but I still don’t trust myself to make good, healthy decisions. Everything I do blows up in my face.

“Any advice?”

We humans are shockingly prone to bad ideas, ideas that escalate to terrible decisions, and then metastasize into actions that undermine, damage, or even ruin our lives and futures. We’d all like to think that we’re a lot better off than the letter-writer above, and most of us probably are (if not nearly so self-aware), but vanishingly few of us have a consistently good track record of decision-making and none of us is as good as we think we are. Even when we’re on the straight and narrow path to success, we are prone to wander. None of us is unbroken, unscathed, or unhurt.

The idea that we act in our own rational self-interest with any degree of regularity is, quite obviously, ludicrous and is falsified every single day by our choices and our lives. Worst of all, we readily recognize such self-destructive behavior in others – such as the above correspondent – but consistently and tragically lack the ability to see it in ourselves.

We can’t seem to help it.

The ever-practical Abraham Lincoln asked, “It is not ‘can any of us imagine better?’ but, ‘can we all do better?’”

I say we can. In fact, we are getting better, a little better all the time.

With the right outlook, approach, and effort, we can expand upon that success. Continue reading

Birthday Luck

I had been fitfully and uncomfortably sleeping, dreaming of a small dog licking my leg and stealing my snack. I awoke to find an escaped boxer with a cute face avoiding my eyes and licking her lips. Once the flight attendant found her rightful owner, who was not nearly as embarrassed as she should have been, I reassess my situation.

Fredonia House

My Childhood Home

I’m still more than an hour behind schedule and said to be losing even more ground on account of intense headwinds. I’m still scrunched into a long metal tube with the seat-back in front of me compressing my kneecaps into my hips while hurtling cross-country, still several hours from arrival home in San Diego. I’m still tired from lots of planes and being away from home for too long. I’m not in the most conducive spot I can imagine for counting my blessings.

But count them I shall, as part of this birthday reflection. “Birthday luck” describes a nuclear explosion of luck that is supposed to happen inside you on that day, giving you the ability to do anything. I don’t really have birthday luck, of course, but my luck is so good that it’s hard to tell the difference.  Continue reading

First-Rate Intelligence

I was introduced to behavioral finance by the classic “Gorillas in Our Midst” experiment. You have almost surely seen it. If not, have a look.

When I first saw the video, like roughly half of viewers busy counting passes, I never saw the gorilla and was dumbfounded by what I had missed. In his book, Thinking, Fast and Slow, the Nobel laureate Daniel Kahneman highlights this experiment and argues that it reveals that humans are “blind to the obvious, and that we also are blind to our blindness.” Some use this experiment, among others, to claim that we’re generally hopeless.

In that context, the arrogant moniker we have given ourselves – homo sapiens (Latin: wise man) – seems ironic at best. Traditional economic theory insists that we humans are rational actors making rational decisions amidst uncertainty in order to maximize our marginal utility. Yet the idea that we’re essentially rational creatures is a myth, and a very seductive one at that, especially as and when we relate the concept to ourselves. We tend to think that we’re almost superhuman in our ability to invoke reason to our advantage.

Biased

Despite our bluster about alleged rationality, we are biased through and through. There is an exceedingly long list of cognitive and behavioral biases to which we are prone that make it difficult for us to reason effectively. Here’s just one example from an exceedingly long list. Continue reading

Go for It

Based upon irrefutable mathematics, football teams should be much more aggressive on 4th down – they punt and kick field goals far too often. As far back as 2002, University of California Berkeley economist David Romer expressed his hope that coaches would begin maximizing their odds of victory when the related data became more widely available.

As if.

Football Outsiders introduced an Aggressiveness Index back in Pro Football Prospectus 2006. Over the years, the index has consistently found that “no NFL coach is as aggressive as the data suggests he should be.” Simply put, teams and coaches “don’t maximize.” Continue reading

Play the Hits

I am a huge fan of wonderful musical artists performing live, and I have been blessed to have seen many great ones. My first big concert was Jethro Tull in 1973 and I have tickets for Casting Crowns Sunday evening. The best was probably the Simon & Garfunkel reunion concert in New York City’s Central Park, exactly 38 years ago, on September 19, 1981.

Wow.

I’ve seen Paul McCartney do a setlist of 36 Beatles songs. The Eagles. Linda Ronstadt. Frank Sinatra. Bonnie Raitt. Stephen Stills. Queen. The Doobie Brothers. Pentatonix. Jackson Browne. Sheryl Crowe. The Four Tops. John Fogarty. Frankie Valli. Rhiannon Giddens. Billy Joel. The Guess Who. Mary Chapin Carpenter. The Spinners. Sugarland. Maynard Ferguson. Manhattan Transfer. Needtobreathe. Journey. The Temptations. Alison Kraus. Chuck Mangione. Stan Kenton. Take Six. The Righteous Brothers. Barry Manilow. Switchfoot. Judy Collins. Chicago. Elton John. Ray Charles. Fleetwood Mac.*

The one constant among all these great events is that the artists played their hits. I’ve seen James Taylor a bunch of times – the first time was Nashville in August 1982, the most recent Las Vegas in May 2019. No matter what album he was promoting at the time, he always played Carolina in My Mind, Sweet Baby James, You’ve Got a Friend, and Fire and Rain.

The exception that proves the rule is the ever-enigmatic Bob Dylan. One of times I saw him he played three Sinatra covers and an Yves Montand (!) cover but no Like a Rolling Stone, A Hard Rain’s A-Gonna Fall, All Along the Watchtower, or Mr. Tambourine Man. Go figure. Some fans get really (and understandably) angry if their favorites aren’t played in concert.

In the worlds of investing and personal finance, it’s easy to focus on the controversial, the difficult, and the arcane. But we should take great care to keep showing fealty to our greatest hits – the tried and true principles that we can and should all agree on and return to routinely. Today, I’m going to circle back to the greatest hits of personal finance — a crisp thirteen-song set — and play them (at least) one more time. Continue reading

Best Investment Writing, Volume III

The third annual volume of The Best Investment Writing series has now been released. After books in 2016 and 2017, the publishers decided to make the entire 2018 volume available via audio format, with the authors reading their winning selections. I was honored that my “Dear Future Me” was selected for inclusion. The audio version lasts about 10 minutes and is available here.