Chairman’s Letter Q2 2021: Expectations Are Safer Than Forecasts

We are predicting a turbulent but successful year for our clients.




July 1, 2021

“For Jesus Himself testified that a prophet has no honor in his own country” (John 4:44)

It’s been about 18 months since our worlds were turned upside down. If anyone had prophesied your portfolio valuation on this day 18 months ago you likely would have considered the forecast foolhardy. Yet, here we are. 

I recall a letter by Morgan Housel that I think fairly frames what we can expect in the future. 

“I expect there to be one or two recessions per decade. I don’t know when they’ll come.

I expect that some investments I make won’t do well. I don’t know which ones.

I expect the stock market to drop 30% or more once or twice a decade. But I don’t know when.

I expect interest rates will rise. Maybe this year, maybe not.

I expect another financial crisis. But who knows when it will come.

These are not contradictions or cop-outs. There’s a big difference between an expectation and a forecast, even if they seem similar.

An expectation is an acknowledgement of how things worked in the past and will likely work in the future. A forecast is strapping that idea to a specific point in time.

In an ideal world we could forecast investment details with pinpoint accuracy. But we usually can’t, because there are too many moving parts and unknowns to identify exactly when and how billions of strangers will act.

This often leads to two responses:

• Forecast anyway, giving yourself a false sense of precision and confidence.

• Extrapolate, assuming no changes from today.

Both can be dangerous. It can be way more useful to have expectations without specific forecasts.

When you expect something to happen over time, you’re not surprised when it comes. It forces you to invest with room for error, and psychologically prepares you for inevitable disappointments. This extends beyond investing: Business planning, career planning, raising kids, and relationships fall into that bucket.

The difference between, “I expect one or two recessions per decade,” and “I expect a recession in the second half of 2018” is ten miles wide.

The difference is what each does to behavior. If I expect recessions, I’m not surprised when they come. But since I don’t know when they’ll come, I won’t take any action in my portfolio that tries to navigate around the next recession. And those actions tend to be the root of most bad investment decisions for amateurs and professionals alike.

There is no reason to forecast unless you’re going to take specific actions tied to that forecast. If you want to take fewer actions without being willfully blind to the future, just have expectations.

It’s intellectual humility in an industry that doesn’t have enough.”

There are many uncertainties to come. There always are. There are wounds to be healed. There always are. There are thousands of forecasts as to what will come next. Nothing new there and, in many respects, the past 18 months have proven again that forecasts are not very helpful in portfolio construction decisions.

That’s why we are investors in world-class businesses. It’s easier to spot the best-in-class products or services than forecast the weather, much less the projected path of the stock market. It’s best to expect more of the same: random occurrences happening in a very large ecosystem.

We expect turbulence but trust that the companies you own will continue to navigate a steady course regardless the direction of the blow.

We hope you have an enjoyable and relaxing summer and look forward to seeing you in the fall in our new office.