Every now and then, we are reminded of Warren Buffett’s statement about how when Howard Marks’ memo lands, you stop everything else and read it. This one which came on 9th April shows why Buffett said what he said. It is a good follow up to the Dunning-Kruger piece we featured earlier this month. Whilst all of us market participants are breaking our head trying to figure out not only what Trump does next but also the ramifications of those in the near and distant future, Marks reminds us of the futility of it and more importantly the humility to recognise the future is inherently unknowable with any degree of certainty:
“I consider the phrase “analyze the future” one of the great oxymorons. The future has not yet been created, and it’s subject to millions of complex, unquantifiable, and unknowable factors that will always be in flux. You can ponder the future and speculate about it, but there’s nothing to “analyze””
He titled the memo as follow up to his memo titles during the 2008 global financial crises and Covid:
“I want to say right here about 2008 and the other crises I’ve invested through – as well as today – that I don’t reach my conclusions with confidence or act without trepidation. There’s absolutely no place for certainty in the world of investing, and that’s particularly true at turning points and during upheavals. I’m never sure my answers are right, but if I can reason out what’s most logical, I feel I have to move in that direction.
…Last week’s events remind us of the events of 2008 and the Global Financial Crisis they produced. All norms have been overthrown. The way world trade has operated for the last 80 years may be of little relevance to the future. The impact on economies and the world at large is entirely unpredictable. We’re faced with large-scale decisions, yet again there are no facts or prior experiences on which to base those decisions. Truly nobody knows, and a lot of this memo will be about things we can’t know for sure. But I hope it’ll help you organize and evaluate the issues.
…I want to point out that there are no experts on the subject at hand. Economists have analytical tools and theories to apply, but no economist and no tool will produce a conclusion in this instance that we can follow with confidence. There have been no large-scale trade wars in the modern era; thus, the theories are untested. Investors, businesspeople, academics, and government leaders will all give advice, but none of them is much more likely to be right than the average intelligent observer. The things on which everyone will agree are obvious, such as the likelihood of higher prices. The less obvious truths will be harder to discern.
…One of the things I insist on is that even for someone who deals with the future via forecasts, a forecast isn’t enough. In addition to a forecast, you also need a good sense for the probability your forecast is correct, since not all forecasts are created equal. In this case, under these circumstances, it must be accepted that forecasts are even less likely to prove correct than usual.
Why? Primarily because of the vast number of unprecedented unknowns involved in the current matter, which has the potential to turn into the biggest economic development in our lifetimes. There’s no such thing as foreknowledge here, just complexity and uncertainty, and we must accept that as true. This means that if we insist on achieving certainty or even confidence as a precondition for action, we’ll be frozen into inaction. Or, I dare say, if we conclude we’ve reached decisions with certainty or confidence, we’ll probably be mistaken. We must make our decisions in the absence of those things.”
On the bit about probabilities, it is worth reading Mauboussin’s piece on how in fields like investing where we are dealing with inherently uncertain outcomes, probabilities associated with payoffs can help us deal with uncertainty better.
Marks then goes on to give his take on the tariffs. In conclusion:
“I consider the tariff developments thus far to be what soccer fans call an “own goal”… I like the way things have gone during my lifetime…I’ve enjoyed living in a peaceful, prosperous, and increasingly healthy world, and I’m not eager to see that change…Just a couple of months ago, the U.S. economy was performing well, the outlook was positive, the stock market was at an all-time high, and there was much talk about American exceptionalism. Now, if Trump’s tariffs are put into effect, the U.S. economy is likely to experience a recession sooner than otherwise would have been the case, higher inflation, and extensive dislocation. Even if the tariffs are reversed entirely, it’s unlikely the other nations will dismiss this incident and conclude that they have nothing to worry about in terms of relations with the U.S…. It must be borne in mind, however, that whereas the negative ramifications from tariffs will probably be felt almost immediately, any gains are likely to come only in the long run, following a multi-year period of adjustment.”
What does it mean for markets?
“On the one hand, if the tariffs remain as announced and retaliation leads to an all-out trade war, the economic consequences could be truly dire. But on the other hand, cooler heads (and highly negative political and stock-market reactions) could prevail, causing the tariffs to be rolled back to less harmful levels, perhaps even leading to gains for free trade.”
What should investors do?
“To paraphrase Mark Twain, there are themes that rhyme throughout history. For that reason, just as I recycled the title of my post-Lehman bankruptcy memo for this one, I’ll also borrow its closing paragraph:
Everyone was happy to buy 18-24-36 months ago, when the horizon was cloudless and asset prices were sky-high. Now, with heretofore unimaginable risks on the table and priced in, it’s appropriate to sniff around for bargains: the babies that are being thrown out with the bath water. We’re on the case.”
The best investment opportunities come in a crisis – look out for quality businesses being dumped and hence available at reasonable valuations which build in margins of safety for the unknowable future.
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