Leithner Letter Nos. 213-214
26 July 2017 - 26 August 2017

My impression is that “strategists” are very skilled at summarising and expressing current conventional wisdom, i.e., knowing what presently excites the herd. They don't influence mass expectations, and still less do they create them: instead, they reflect them. … On average since the mid-1920s, the S&P 500 has increased, on average, by x% per year. From the early ‘80s to the late ‘90s, it rose by y% per year on average (where y > x). So, as a baseline, strategists will tell us that, during the next year, the S&P will rise by (say) (x+y)/2 percent. Clearly, these means have standard deviations, and so they pad their “predictions” with various fluff (“upside risks,” “downside risks,” etc.).

But during booms, the crowd expects – nay, demands – much better results, and during busts it fears worse ones; that is, the crowd tends to extrapolate the immediate past into the indefinite future. Strategists incorporate these expectations into their public utterances. So why do these folks not just keep their jobs, but prosper? Because their job isn’t to predict the future: it’s to tell people what they want to hear about the future. And why don’t smartarses remind strategists of their past utterances? Because members of the general public don't, by and large, like to be reminded about past mistakes; more generally their expectations about the future and its actual course are very different things. Besides, directing the strategist back to his past vomit is, in effect, to question today’s conventional wisdom (namely that the strategist knows something that the rest of us don't).

A final point: my impression is that strategists aren't remotely troubled by their past utterances because, psychologically, they're simply incapable of feeling sheepish. That psychological attribute tends to limit their supply, and the public's continuous demand for them ensures their price in the market remains high.

Chris Leithner
Correspondence to Kevin Duffy (5 December 2007)

Experts Can’t Predict – Yet Investors Must Plan

It’s unwise to allow experts’ predictions to determine one’s investment decisions. Authorities generally don’t provide reliable guides to the future: indeed, the more confident is the expert, the less accurate, on average, will be his prediction – and therefore the poorer will be any resultant decision. Yet investment reflects particular (albeit perhaps tacit) assumptions about the future; so does choosing a career, resolving to marry, starting a family, buying a house, retiring, etc. More than mere guesses or wishful thinking must justify such actions.

What, then, to do? Investment is a process that generates decisions; accordingly, as part of this procedure investors must understand that

  1. the predictions of experts – including the world’s foremost economists’ assessments about the business cycle, rates of interest, etc., are typically less reliable than random guesses or tosses of a coin;
  2. how we think about the future in general rather than specifically what we think about it provides justifiable means to navigate through its fog of risk and uncertainty.

To read the full Newsletter (PDF), click here.

  Chris Leithner