Recently upon finding out I invest for a living, an acquaintance asked me to let her know if I see something coming in terms of a big market selloff, because she is approaching retirement and is scared of a bear market. This is both typical and mystifying to me in terms of the way regular folks tend to think. The reality is that I don’t know the future any more than she does. Investing equals decision making under the condition of uncertainty.
How an Investor Should Conceive of the Future
To properly conceptualize the future as an investor, you need to create different scenarios and assign subjective probabilities to them. You want a strategy and an approach that is robust against this subjective probability distribution of the future. You can’t control your returns, but you can control your risk profile. Managing your risk requires balancing the probabilities against their potential consequences. As Seth Klarman has said, nothing is more important than the ability to sleep at night.
How to Approach Investing In an Uncertain World
An investor’s task is to manage their assets and cash flows so they will provide for their needs over their lifespan. How do you do that? You estimate what you will need and make a plan that is likely to get you to a prosperous retirement. Don’t extrapolate to the best case scenario. Prepare for the worst and hope for the best. But, the big thing is to save and invest something. Anything is better than nothing.
If you are young and investing for retirement, Vanguard suggests putting aside 15% of your income toward this goal. If you can meet that number terrific. If not, 10% is a reasonable goal when getting started. If you get an employer match, so much the better as this will decrease the amount you need to contribute.
You also want to make sure that you have enough in savings and disposable income to cover your living expenses during the portfolio building stage of your investing life. You don’t want to get disheartened or need cash during a bear market and either stop contributing or sell your investments at a loss.
Munger’s Approach to the Market’s Vicissitudes
Charlie Munger has said that he doesn’t try to predict the ups and downs of the market, he just tries to swim better than the tide. He has also said if you aren’t able to endure a decline in the quoted price of your stocks by 50% and react with equanimity two or three times in your life, then you deserve the mediocre returns you are likely to get.
I always get a kick out of market pundits who talk about how uncertainty is high right now. Uncertainty is always high. While trends persist, often far longer than you may think, recessions and bear markets many times begin when the consensus is fairly cheery. Anyone who tells you they know what is coming next in the markets is a liar, and they are probably trying to sell you something.
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“There are two kinds of investors, be they large or small: those who don’t know where the market is headed, and those who don’t know that they don’t know. Then again, there is a third type of investor — the investment professional, who indeed knows that he or she doesn’t know, but whose livelihood depends upon appearing to know.”
— William Bernstein
“The difference between a prediction and a probability is the difference between a pundit and a professional. One makes concentrated bets on the belief that they can predict the future and the other diversifies with the understanding that they cannot.”
— Charlie Bilello
“The question about selling a really great business is never. Because to sell off something that is a really wonderful business because the price looks a little high or something like that is almost always a mistake. It took me a lot of time to learn that. I haven’t fully learned it yet. It’s rare it makes sense. If you believe the long term economics of the business are terrific, it rarely makes any sense to sell it.”
— Warren Buffett
“Having, and sticking to, a true long term perspective is the closest you can come to possessing an investing super power.”
— Cliff Asness