Roughly right or precisely wrong?
By Josh Persky, Founder & CEO, Briefcase
“People would rather believe than know” - E.O Wilson, Biologist.
Attachment is where the suffering lies.
Why do we tell stories? I have been thinking about this a great deal, especially with the long weekend just passed, having spent it with my three beautiful, young children. Completely exhausted by the endless demands placed upon parents with young kids, I get to the end of the Monday night, finish line in sight (bedtime), and they ask me to read them a story.
I somehow manage to summon what energy & patience I have left, pick up a book and read the story. To my great surprise, despite my exhaustion, I find myself enjoying it immensely.
As a species, we have been telling stories since our early beginnings. From cave paintings and ancient scrolls, right through to Harry Potter and beyond, stories are an essential trait of being human. Storytelling is the gateway to truth telling, helping inform our opinions, self-views & playing a vital role in our decision making.
We all need a story to tell ourselves, but these stories often run counter to a fact or statistic that can be committed to memory. This is both practical and good – we can all recognise that the space between what works in an excel spreadsheet & in real-life can be extremely wide (my own family budget), or as Robert Burns more succinctly put it “The best laid plans of mice and men often go awry.” This phenomenon occurs not because we don’t know the statistics, but because real-life stories are so effective at showing us what certain parts of a statistic mean.
What is more dangerous however is when statistics are ignored, and powerful narratives take over. When we think about what changes people’s minds & reaffirms pre-existing beliefs, it isn’t statistics –it’s what was heard on the news, read on social media or espoused by an industry expert.
When comparing statistics to a compelling story, our brains will almost always latch onto the story – it sounds & feels more compelling. But beware of “the story.” More importantly, why don’t we question the stories we like?
Certainty in investing is rare.
Many of us are acutely aware that investing brings with it uncertainty & a lack of predictability. Yet despite this, investors of all shapes & sizes hang on for dear life to expected returns, risk forecasts, stock predictions & assumptions. The “story” by any other name.
In fact, much of portfolio construction & asset allocation has forecasting as the cornerstone of the investment process itself. The idea of “expectation being suffering under construction” could not be more appropriate than in the world of investing & quantitative finance.
The reason we rely so heavily on forecasting can be directly tied to why outsourcing of the investment management function has become so prevalent the world over – if the “answer to the quiz” e.g., return & risk expectations, is given by an industry expert or reputable firm, the power of groupthink & intellectual inertia reinforces the investors biases & thoughts.
What does this have to do with Briefcase?
At Briefcase, we think differently. We continue to challenge our own perceptions that fit our own cognitive bias. Having managed more than $50 billion collectively, we have built our portfolio construction & asset allocation capabilities knowing that investment market returns are not normally distributed. They display skew, kurtosis & tail risk. Much like investors themselves, markets are unique & change over time.
Our investment approach recognises that variance & correlations are not static & do change over time. The COVID-19 March 2020 sell-off was a classic example where we all saw cross-asset correlation increasing. I don’t recall that being predicted or accounted for in any return forecasts or capital markets assumptions I either read or helped build in a former life, yet it happened. It always does.
Our investment process in building personalised portfolios aims to address the probable, not the optimal. Investing is complex, and complex things are always uncertain.
Having an “answer” (the Fed will be forced to reduce interest rates, house prices will soften, inflation is likely to settle above policy target) is not only the path of least resistance - but it also makes us feel better. It undoubtedly feels better than saying “I don’t know.”
Most investors recognise that certainty is rare and making investment decisions based on the “odds being in one’s favour” is probably the best you can do. This is probability at work & yet, almost no one uses probability in the investment world (or any world for that matter) at all – if they did, casinos would not operate, horses wouldn’t gallop around a track & poker machines wouldn’t exist.
Our world is driven by probability, but our minds are programmed (and find it easier) to think in black & white, right, or wrong. Our investment decisions are no different. Our vision at Briefcase is to be honest about probability of investment outcome, not expectation & forecast.
Like to learn more? Visit www.briefcase.au or email enquiries@briefcase.au for further information.
Briefcase Pty Ltd (AFSL Number 546257) does not warrant the accuracy, completeness, or correctness of any information herein.