Wrong for the nth time

I am bad at Predictions. In 2004, I did not have any major position in the markets but was bullish on the reelection of the NDA government. In 2009, I had what I assumed was a position that won’t get hurt regardless of the election results (a short option strangle on the Nifty). Nope, markets decided that I was actually wrong by moving way outside what my position was accommodative of. 

The next big test of my prediction skills came in when we saw Britain vote for whether to remain in the EU or not. My view as you may have guessed was that Britain would not be stupid to exit the EU. But stupid I turned out to be. The next wrong opinion came when Corona came calling. I felt that the impact would not be too big. Man, was I wrong once again. Finally, I did not anticipate Russia to invade Ukraine, so yet another negative mark for me. 

Even a monkey would have got 50% right I would think. 

Drawdowns are tough – both in terms of the money, notional or not, that we see being lost as well as the pain of dealing with an investment that is below water for a long time. Yet, markets spend the majority of their time in a drawdown.

Eddy Elfenbein in his CWS Market View posted this,

The Limits to Growth Turns 50

Fifty years ago today, a fascinating book was published called The Limits to Growth. The book claimed that the world would run out of valuable resources by the 1980s and 1990s. Its forecast was based on computer models by Jay Forrester of MIT. The book claimed that the world population and industrial production would soon massively decline.

Yikes! Predicting the end of the world is big business. Apparently, the public loves being told that the end is nigh. The disaster stuff was especially popular in the 1970s. Remember Soylent Green? That film takes place in…2022.

The Limits to Growth was a smash hit. It was published in 30 languages, and it sold 30 million copies. Despite its popularity, all of the book’s predictions completely flopped. The book was being updated as recently as 2012.

Why did they get it so wrong? Julian Simon pinpointed their error. Let me turn it over to Wikipedia:

[Simon argued that] the very idea of what constitutes a “resource” varies over time. For instance, wood was the primary shipbuilding resource until the 1800s, and there were concerns about prospective wood shortages from the 1500s on. But then boats began to be made of iron, later steel, and the shortage issue disappeared. Simon argued in his book The Ultimate Resource that human ingenuity creates new resources as required from the raw materials of the universe. For instance, copper will never “run out”. History demonstrates that as it becomes scarcer its price will rise and more will be found, more will be recycled, new techniques will use less of it, and at some point a better substitute will be found for it altogether.

This is a subtle point that’s simple but explains a lot. People are smart. They constantly innovate and update. I bring this up because that’s why the stock market has been such a great long-term investment. It’s the only investment that taps peoples’ ability to create and innovate. It’s also why we’re focused on the long term.

The winning strategy has been to ignore the fear mongers and stick with the companies that have a loyal following. 

What has saved my skin has been one thing and one thing only – the ability to adhere to the system even during the worst possible times. While the system most of the times did not save the pain (it was long before the UPA-2 election win though), the losses were quickly recovered.

Currently, it’s painful to be fully invested even as the markets seem to be rocking lower. The fear though is not because of the size of the fall but the narrative that has led to this fall. I have no clue how things will pan out from here. But systems regardless of the lag will provide an exit. The question is, can we adhere to it?