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Howard Marks: Get Used to Uncertainty

The Oaktree Capital chairman argues that investors can’t predict what will happen — only prepare by shoring up their portfolios against extreme risks.

When will the Covid-19 pandemic end? What’s going to happen to the economy? Investors have a lot of questions about the future — but no one, according to Howard Marks, has the answers.

In his most recent client memo, the Oaktree Capital chairman addressed the current state of uncertainty and what he described as the “futility of forecasting,” arguing that not even expertise in a given field necessarily equips a person to predict what will happen. 

It’s an argument the credit investor has made before, including in his last missive to clients in early May. In this newest letter, released publicly on Thursday, Marks explained that forecasting is impossible because the future is path-dependent — in other words, whatever happens between now and then can affect the ultimate outcome.

“Not only how will the virus behave, morph, travel, react to warm weather and infect, but also how fast will we reopen the economy, how will people behave when we reopen it, and what will the virus do at that time?” he wrote. “Not only can’t we predict people’s actions and the many other things that will determine the course of the virus and its impact on the economy, but we also certainly can’t predict when they’ll take those actions — and that will count just as much.”

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Noting that people tend to look to experts for insights into what may happen, Marks warned against “conflat[ing] expertise and insight with the ability to predict the future,” or treating “experts in one field as if they’re knowledgeable about all others.”

The “doctors and public health officials on TV who inveigh against quickly reopening the economy,” for example, “may well know much more than most about the medical and public health aspects of the coronavirus,” Marks wrote. But they “may not take into consideration the importance of restarting the economy,” he added.

Businesspeople and economists may know more about how to minimize damage done to the economy — “but what do they know about the cost in human lives?” Marks asked.

“True expertise is scarce and limited in scope, expertise and predictable ability are two different things, and we should be careful about whom we listen to and how much weight we give to their pronouncements,” he added.

Despite of all this, Marks suggested that investors are not “powerless” to deal with whatever comes next. He argued that investors can prepare for extreme and unpredictable events by “recognizing that they inevitably will occur, and by making our portfolios more cautious when economic developments and investor behavior rend markets more vulnerable to damage from untoward events.”

“We must make decisions regarding the future without knowing it,” he wrote.

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