As I reread 8 Simple Truths by Josh Brown, a post I revisit at least twice a year, I was reminded how often the crucial ideas are the simplest.
Reality:
- Happiness = reality – expectations
- Stock return = reality – expectations
“If you only wished to be happy, this could be easily accomplished; but we wish to be happier than other people, and this is always difficult, for we believe others to be happier than they are.” – Montesquieu
Likelihood:
The evening news is on and the meteorologist says, “there’s a 70% chance of a sunny day tomorrow.” Tomorrow will be a nice, sunny day.
If the meteorologist instead says, “there’s a 30% chance of thunderstorms tomorrow.” Tomorrow might be a day to stay inside.
While these are the same exact predictions, the way we interpret them is completely different. Was the meteorologist wrong if it storms tomorrow? A storm can be unlikely but still occur. Unlikely events occur all the time.
“Oftentimes, the most surprising outcome is the one that happens…Because not only do you not know, you don’t even know what you don’t know. Engineers and scientists struggle with this concept. You can’t imagine some of the calls and meetings I’ve been in over the years trying to hammer this home. There’s no formula. Many people are wired in such a way that they can’t or don’t want to accept that.”
Psychology:
No one is talking about what’s likely to shake markets the most. That’s exactly the way it’s supposed to be.
“…old columns are filled with stories of dramatic reversals, inexplicable rallies and death-defying plunges. Nearly everything consequential seemingly sprung into the conversation from out of nowhere. In real-time…I was glued to the edge of my seat. And the only thing that’s changed since then is the names of the people and the ticker symbols of the stocks they’re involved with. The behavior is always the same.”
Financial media is littered with intelligent people saying something mildly plausible. The more one listens to them, the easier it is to forget that the future is unknowable. Not only that, even if the future were perfectly knowable, there is still a high likelihood of misjudging the reaction to that future state.
“There are no facts about the future.” – Howard Marks
Investing:
This is the most exciting time to be a tax-aware investor in history. Product innovation, access to technology and information, major asset managers now thinking about tax implications for wealthy investors instead of tax-exempt institutions. If you are an investor with $5M+, the ability to engineer a portfolio in a thoughtful, low-cost, tax-efficient, and diversified manner has never been easier. The unlock is understanding how to put the tools together in a way that allows the machine to hum.
“Don’t practice until you can get it right, practice until you can’t get it wrong.” – Nick Saban
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Let’s get after it this week!
Brooks
Brooks Palmer, CFP® is Head of Investments at Root where he helps identify, evaluate, and implement investment solutions tailored to clients’ needs. In Full-Court Press, he breaks down what’s happening in the markets—cutting through the noise and jargon—while connecting it to Root’s core investment tenets so you can make the most of your money and your life!
The examples provided are hypothetical and for illustrative purposes only. Investing involves risk, including the possible loss of principal. Past performance is not indicative of future results. The information presented should not be construed as investment advice or a recommendation to buy or sell any security or implement a particular strategy.
Advisory services are offered through Root Financial Partners, LLC, an SEC registered investment adviser.