Would you rather make money or be right?

In the world of financial markets, everyone wants to come across as smart. Every single thing about fund management is about signalling to the world that we are smarter, more patient, more disciplined and completely different to everyone else (including the piece - psyops!). Why? Because the smarter we appear, the higher the chance that someone thinks we are smart and hands over their hard-earned cash for us to responsibly look after. The world has changed a lot since the invention of social media and these days fund managers who aren’t already in the room tend to find it hard to get a foot in the door. From our side we have tried to pursue an approach of truth. We write what we really think and using our newsletter each week we share the best of what we are doing, thinking, reading, watching etc. We are out here to try and build relationships that last with people who we like (but who are not necessarily like us).

The intellectual rigour the “best managers” use to outsmart the market is the stuff of legend and of course one cannot be a complete dumbass if one wants to make it in public markets. But one needs to remember that history is always written backwards and by the winners. We can all weave beautiful stories as to the whys and whats of what we’ve done before.

We started thinking about this due to the recent inflation debate that has been rampaging through markets for the past while. While we do hopefully write some kick-ass blogposts, the truth is that we wouldn’t exactly call ourselves intellectuals. We try and bring a pretty direct and common-sense approach to investing and to do the basics right. Once things get too complicated, we tend to sit it out. But once this inflation narrative got going, we found ourselves being sucked into the old trap of trying to predict the future. You may be surprised to discover that we don’t believe predicting the future is the right way to manage money. Predicting the future implies an approach of “I am right, the market is wrong”. Sure, we have a view on what may unfold and always a base case, but we use the market price action as our guide, and we always have a plan B. There is always an exit strategy so as not to get rugged.

But in terms of making explicit predictions, our experience has led us to conclude that in trying to prove yourself right you usually end up rugging yourself. 

Our inflation view originally was that the inflation debate would be resurrected and there was fuel for a return of the inflation story in markets, especially off the low base and bottlenecking of the global economy during COVID. This would mean some instruments would catch a bid – commodities et al in the main and there was money to be made. Ours was not a bottom-up assessment of all the variables i.e. we didn’t have a view as to whether longer inflation would ACTUALLY arise. We are not experts on long rates and short rates and repos etc and we don’t claim to be. As we found ourselves being dragged deeper into the inflation debate quagmire, we noticed quite a lot of things. As with most things these days, there were two camps – those believing (correct use of the word) inflation is transitory and those believing it will persist and we have entered a new paradigm. As we watched the debate between these two camps unfold pretty much everywhere where a platform presented itself, we began to become somewhat dismayed at the level of intellectual strutting going on. It is almost as if some people believe through sheer weight of intellect that their outcome will be ordained.

Markets don’t actually work like this. Markets are made up of people. We like to call it the market consciousness. The Market consciousness doesn’t care whether you win the debating competition. It cares about how much money goes in and how much goes out. Maybe inflation will prove persistent and maybe it won’t. The honest truth is we just don’t know. And the question we keep asking ourselves is how on earth everyone else (in both camps) can be so sure that they are right? Either we are talking Nostradamus level ability to see the future, or we are talking people who dramatically overestimate their own ability.

The Fed meeting this week resulted this time in loud declarations of victory for the inflation doves and they celebrated in true modern social media style by rubbing the noses of the hawks in the apparent victory. We don’t really understand why.

See, the thing about managing money is that it doesn’t matter whether you are right or wrong. It’s about how much you make when you are right and how much you lose when you are wrong. Celebrating being right (for now) doesn’t really get you anywhere unless you are a public personality optimising for engagement. And maybe that is why everyone is so keen to be seen as being smart and being right all the time. 

In fund management, the scorecard is all that matters. Good calls come and go. Soros and Druckenmiller are not two of the greatest investors of all time because they broke the Bank of England. They are the greatest because they have delivered incredible returns consistently over many decades.

We try keep things simple and we know we can’t predict the future. It’s hard. And the main problem is that you don’t know you are right until it’s happened. We don’t have the appetite to be on that rollercoaster. Maybe others do.