What Really Matters?

I’ve gathered a few ideas from several of my memos this year – plus some recent musings and conversations – to form the subject of this memo: what really matters or should matter for investors. I’ll start by examining a number of things that I think don’t matter.

What Doesn’t Matter: Short-Term Events

In The Illusion of Knowledge (September 2022), I railed against macro forecasting, which in our profession mostly concerns the next year or two. And in I Beg to Differ (July 2022), I discussed the questions I was asked most frequently at Oaktree’s June 21 conference in London: How bad will inflation get? How much will the Fed raise interest rates to fight it? Will those increases cause a recession? How bad and for how long? The bottom line, I told the attendees, was that these things all relate to the short term, and this is what I know about the short term:

  • Most investors can’t do a superior job of predicting short-term phenomena like these.
  • Thus, they shouldn’t put much stock in opinions on these subjects (theirs or those of others).
  • They’re unlikely to make major changes in their portfolios in response to these opinions.
  • The changes they do make are unlikely to be consistently right.
  • Thus, these aren’t the things that matter.

Consider an example. In response to the first tremors of the Global Financial Crisis, the Federal Reserve began to cut the fed funds rate in 3Q2007. They then lowered it to zero around the end of 2008 and left it there for seven years. In late 2015, virtually the only question I got was “When will the first rate increase occur?” My answer was always the same: “Why do you care? If I say ‘February,’ what will you do? And if I later change my mind and say ‘May,’ what will you do differently? If everyone knows rates are about to rise, what difference does it make which month the process starts?” No one ever offered a convincing answer. Investors probably think asking such questions is part of behaving professionally, but I doubt they could explain why.