Don’t Bet On Accurately Predicting the Future
A countless number of forecasters attempt to predict the future of financial markets, geopolitical affairs or the next technological revolution, but rarely are these prognosticators correct. Even less likely is their ability to do it on a consistent basis.
In the words of Dan Gardner, author of Future Babble, “All too often, their [economists] crystal balls work no better than those of fortune-tellers.”
Predicting the future is not the same as extrapolating the present. For example, the fact that a growing percentage of our population is going to require services designed for the elderly is materially different than predicting Middle East turmoil will drive the price of oil to skyrocket and remain in excess of $100 per barrel.
This viewpoint is a fundamental tenet of ours at YIS Capital: investments contingent on predicting certain futures have a low probability of success. Wherever possible, we want to avoid investing in companies or strategies that are contingent on the ability to correctly predict a future that is radically different than today.
Rather than taking a directional bet, our focus is to participate with those companies and investment managers that are forging a future through innovation, as well as those able to rapidly adapt and respond – which, in our opinion, is much more valuable and likely than predicting.
In Laurence Gonzales’ book Deep Survival, he discusses how numerous individuals were struck by trains when the railroads became functional. Why? Because people had no context as to how to evaluate the speed of an oncoming train.
This scenario is no different for investments or businesses — even big businesses. Like first-time witnesses to a train, Microsoft — which has unlimited resources and some of the smartest minds on the planet — was slow to anticipate the rapid and profound impact technology evolutions (internet, mobile tech, or cloud computing) would have. Innovative disruptions happen because no one can accurately predict innovation 100% of the time. Luckily, Microsoft has responded by adapting and reinventing itself to benefit in the future created without them.
And it’s not just tech innovations. We can highlight examples in all cases (markets, geopolitical, technology, healthcare) that blindsided everyone. Similarly, we can highlight examples of companies that bet everything on a future that never materialized. We can even incorporate some very recent political predictions that were dead wrong: namely, that Trump could never win, and if he did, the markets would crater.
Change is an inevitable fact, one of the few certainties in all aspects of life. As noted by the New York Times’ Sendhil Mullainathan, the fact that conditions are sure to shift is the only future outcome that we can completely count on. Altering our plans to accommodate the future we expect to happen can frequently amount to a wild goose chase, so to be ready for change it’s most important to leave no options off the table. By planning for a future where we are open to adaptation, we’re best positioned to take on whatever comes next.
Much of Wall Street is focused on predicting the future and calculating how that translates to a specific company or investment. Research analysts are notorious for trying to pinpoint a specific price or range with mathematical means, but numbers cannot offer accurate clarity or true comfort — not in the uncertainty of a nebulous future. As a result, what we try to do is to participate in evolution, not predictions of far-reaching macro changes that are unimaginable or incomprehensible today.
There is no doubt there is enormous reward in accurately predicting the future, however, as substantial as those returns might be, they aren’t likely commensurate with the risk assumed. For some, the enormous upside is appealing, but it’s not where we position our risk-taking. We want to capitalize on those pushing to evolve from where we are today, as well as those fostering the systems and mindset able to inevitably adapt. As legendary investor Howard Marks states, “You Can’t Predict. You Can Prepare.” We want to invest with those prepared and ready to pounce when an opportunity presents itself. Additionally, try to allocate capital to those that embrace what Darwin postulated – It is survival of the most adaptable.
This investment philosophy compels us at YIS capital to shun investments contingent on predicting constantly fluctuating variables like the future of currencies, interest rates or commodity prices. We know there are going to be shocks and surprises and want to invest both in those opportunities able to reasonably withstand those unpredictable shocks along as well as those able to capitalize on opportunities that arise from these outcomes.
In the latter situations, our focus is on those areas where the underlying foundation isn’t in question. For example, people will always want to be healthy and educated, need to eat and have a place to live, want to seek out entertainment, and so on. Helping to make the future or adeptly respond to it is different than predicting it.
Because the future isn’t knowable, we are willing to embrace contrarianism:
- In investing, the herd isn’t always right and there are enormous benefits in thinking independently as we saw in the economic downturn in 2008.
- Markets and prices are often driven by a popularity contest, momentum, and a shared view of what the future entails.
We adhere to one of the most successful investors of our time, Seth Klarman, and his view that opportunities exist by avoiding comfort or consensus. When “the herd” perceives a certain future outcome, there is often opportunity to think independently and recognize that assessment may never come to pass. We consider this consensus view of the future to be no more accurate, than all the well-known commentators that routinely get it wrong.
The inability to accurately predict the future doesn’t create paralysis, it forces prudency and risk mitigation. Opportunities divorced from predicting the future are no less compelling. Focus on what exists today, and avoid setting your actions in concrete. Having the resources and mindset to maintain flexibility offers any organization the chance to prosper in whatever future unfolds.