Being Very, and Immediately, Wrong

“The Middle East is quieter today than it has been in two decades.” — Jake Sullivan, 9/29/23

“It’s going to require … a substantial increase in unemployment and reduction in GDP growth — to bring inflation … down to acceptable levels.” — Larry Summers, Barron’s, 6/16/22

“If the S&P rises to 1,500, it would officially be the latest in the series of true bubbles.” — Jeremy Grantham, Marketwatch, 2/2/11

Do the Math: Trump is Toast — Michael Moore, Substack post, 10/4/24

“It’s tough to make predictions, especially about the future.” — Yogi Berra

I’ve mentioned before that I (with my team’s help) have written a fund letter every month since August 1998. Before that we had written periodically, but after the outbreak of the 1998 emerging markets crisis, I thought our investors would welcome more frequent updates. I continued after the crisis ended, reasoning that I could take 3-4 hours once a month to write, anticipating people’s questions, or have a dozen or more separate 45-minute phone calls – a clear choice.

Many hedge fund managers send a quarterly letter, some of which are opuses – I enjoy Howard Marks’ (Oak Tree) and Paul Singer’s (Elliott) – but I like doing it monthly, as it’s also a structured opportunity to hear what my investment team is thinking and synthesize our views into a few paragraphs. Besides, omitting a month after 26 years would offend my OCD, kind of like missing a NYT Spelling Bee, so I force myself to do it.¹ Even if I have nothing much to say about the big picture, my colleagues always help me with a few paragraphs on our portfolio companies’ results.

Missing the dawn with Spelling Bee on Lake Vembanad, India

Some funds combine their quarterly with a fact sheet, running text along the side. This is also fine, although the compressed space is not conducive to much commentary and I prefer the occasional think-piece, to learn a manager’s mindset. At the other end of the spectrum from the Marks and Singers are VCs. To my eyes, most of them seem to prepare their reports under duress and secretly would prefer Rip Van Winkle investors, who’d awaken from slumber in ten years to find out if they made any money. This doesn’t really work for me.

Wrong in 24 Hours

When the monthly letter is done, I implore our operations staff to email it out to investors as soon as possible, usually the same day. This is because I know that even within 24 hours, something I’ve written can be proven wrong and I may have to rewrite the whole thing. In last week’s letter I commented on the Romanian parliamentary election, saying the result “will allow the incumbent parties to stay in power.” The next day one of the coalition members announced they’d dropped out, throwing the politics into turmoil again.

This has happened often enough to make me careful about any predictions, but I let my guard down with Romania. And, occasionally, unfolding events are so important that it feels necessary to give investors some forward-looking statement, even a hedged one. I went back to our letters leading up to Russia’s invasion of Ukraine in 2022 – not a pleasant time to relive – and found that we spent pages considering all scenarios, ending one discussion by saying, “No one knows for sure – not the negotiators, likely not even Putin himself – so any definitive-sounding pronouncement by the bottomless pool of Russia experts should be discounted.”

By contrast, another well-known Russia-focused fund sent out an open letter, which was widely shared throughout the community, stating confidently that there would be no war. The author had just been to Moscow, spoken to his most plugged-in contacts, and came away certain that Putin was bluffing. When the invasion began a week later, I wondered how embarrassed he was about the letter – though by then he had bigger problems to worry about than something dumb he’d written. Meanwhile, I earn no plaudits because although my team gave a 25-30% probability to the war, we didn’t reduce exposure – a mistake I discussed in my prior post Non-Binary Investing.

Predicting is Hard

The last fifteen years have been rough on prognosticators. Think of the many market pundits who predicted an end to the U.S. bull market as early as 2011, and every two years since. How about everyone who “knew” there would be a hard landing for the economy? Let’s not even get into the 2024 presidential election and the Iowa lady or the guy with his thirteen keys or fourteen knishes or whatever it was. On November 4, my son and I were debating not whether Harris would win but the magnitude of her electoral triumph – an opinion I fortunately kept off of social media.

Now, there are people whose livelihood requires them to make public predictions, like Nate Silver and other pollsters. Financial newsletter writers do it and, despite being wrong as often as any random investor, manage to convince subscribers that their views are worth paying for. I used to read one called The Dines Letter and was amazed and frankly impressed at how he elided his past bad calls while maintaining the illusion that he’d always and ever been right. It was like David Copperfield making the Statue of Liberty disappear (the trick was a rotating viewing platform, by the way). There’s a Latin term for what you need to be a Dines: chutzpah.

Besides requiring amnesia among your readers or listeners, the other approach to 100% successful predicting is to make them general enough to be un-disprovable. The master of this is, naturally, Donald J. Trump. Trump offers more forecasts than your average politician and, like the savviest ones, never promises anything specific, e.g., an inflation rate of X%. Instead, he predicts that we’re going to have so much winning that we’re going to get tired of winning. We’ll have the greatest economy, the best health insurance, etc. Because all of these are states of being that reside in the eye of the beholder, his forecasts can never be disproved.

What Was and What Will Be

Every year around this time, each member of the Firebird investment team writes down their predictions for the year ahead, including what the best- and worst-performing stock and market owned in our fund will be; what the best-performing Eastern European stock that we don’t own will be; and what question we should be asking, but aren’t. When we reveal our answers a year later, the accuracy is never pretty. I’ve never won best forecaster, even once.

So, even in the narrow area that I’ve studied every day for decades, I can only make educated guesses about the future. But it’s worse than that: I’m rarely confident that I know what’s going on right now. Imagine: a market you think you understand starts falling for no obvious reason. You consider the possible drivers, you discuss at length, yet the answer remains obscure. And the minute you think you’ve cracked the code, another variable pops up and the analysis flips again. The truth often is hiding where you aren’t looking at all. Viz.: there’s a theory that the real reason Putin invaded Crimea was anger at Obama for refusing an invitation to his Sochi Olympics. Who knows – maybe?

About the best you can hope for, if you’re an expert in an area and you work hard at it, is to be able to explain events that have already happened. I can give an extemporaneous half-hour lecture on the January 2022 coup attempt in Kazakhstan (well I could, but then I wouldn’t get many more cocktail party invitations). However, neither I nor, I suspect, anyone else besides one of Putin’s BFFs would be ready to confidently explain the Ukraine invasion, which happened just one month after the Kazakh events.

Similarly, Nate Silver, Andrew Sullivan, and 1,000 other Substack writers can debate the 2024 presidential election for another 10,000 hours if they want to, and maybe they can agree on what happened. Maybe, although I note that a book published just three months ago finally unpacks the Hayes-Tilden presidential election of 1876 — so we may have to wait until 2172 to get the real story.²

1. We did miss one month in all those years, February 2022, which evidences the confusion we were in, and the difficulty of valuing Russian stocks when the Moscow Exchange had frozen.

2. Bash and Fisher, America's Deadliest Election: The Shocking True Story of the Election that Changed American History (2024). While I haven’t read this one yet, on the same election I strongly recommend Gore Vidal’s novel 1876, which is not only historically fascinating but a corking good read. I always enjoy passing the Samuel Tilden mansion, now the National Arts Club, when I’m in Gramercy Park. The essential non-fiction book covering that period of U.S. history is Eric Foner’s magnificent Reconstruction (hat tip to my friend Geoffrey Batt for sending it my way).