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The economy will crash because of an asteroid

Updated: Mar 15

Catastrophic stock market news | The Globetrotting Investor

Are you drawn to such titles, news and reports? I hope you are not. And the reason, in one sentence, is that there are too many unknown variables to predict the market with certainty.

One book shares the same sentiment as mine. It is the book ‘Richer, Wiser, Happier.

In the sub-chapter ‘Know What You Don’t Know,' Howard Marks, co-founder and co-chairman of Oaktree Capital Management, shares a favourite insight from the economist John Kenneth Galbraith who said, “We have two classes of forecasters: those who don’t know – and those who don’t know they don’t know.” Instead of acknowledging that they have no idea whether the market will go up or down, investment analysts provide quarterly earnings estimates for companies, downright to a specific number.

Amos Tversky, an Israeli psychologist who studied cognitive biases alongside Daniel Kahneman said: “It’s frightening to think that you might not know something, but more frightening to think that, by and large, the world is run by people who have faith that they know exactly what’s going on.”

Of course, the forecasters get it right occasionally, but Marks regards these successes as proof of the adage that even a blind squirrel sometimes finds an acorn.

Therefore, Marks doesn’t waste any time trying to forecast the market – inflation, interest rates, and economic growth. This is because, as he sees it, the future is influenced by an almost infinite number of factors. So much randomness is involved that it is impossible to predict the future with consistency. Who would ever predict that Russia had invaded Ukraine at the time I wrote this? Nobody. And it is also, for this reason, that he rejects the idea of timing the market.

The investment world is filled with people who believe (or pretend) that they can see what the future holds. As an investor, it is a good reminder that we cannot take them decidedly. There are too many unknowns and sometimes unexplained variables in the world that it is impossible to predict the market with certainty. Hence, it is always important to diversify, invest in tranches, and have a margin of safety.


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