Escape the Strategist Trap
In the inaugural episode of QPD Highlights, we discuss the anti-strategist approach and how investors can cut through the noise of today’s market environment.
- One’s ability to forecast the market’s future is poor, so cut out the noise.
- “Higher for longer” in terms of interest rates may be misleading.
- Wars in the Middle East and Ukraine are reasons to demand a margin of safety in your investments.
- When others are distracted, look for opportunities.
Hello, this is John Le, director of marketing at Cambiar Investors, and welcome to QPD Highlights. I’m thrilled to have you join us on this weekly journey through the world of finance and investing. Just to set the stage, QPD Highlights is a shorter, more concise offshoot of our longer-form QPD podcast. While our main show delves deep into the diverse topics in the realm of finance and investing, here are our highlights. We’re all about providing you with quick, bite-sized insights on a single key investment topic, perfect for your busy schedule. Whether you’re a seasoned investor or a curious beginner, or just someone looking to stay informed, we hope this podcast will help you on your investment journey. All right, now onto this week’s episode. We have Cambiar president Brian Barish here to discuss the anti-strategist approach and what it means in today’s market environment, where information flow is 24/7 and coming from all directions. How should investors cut through the noise? So let’s get started. Brian, can you describe what an anti-strategist is?
So an anti-strategist is someone who makes a point of not listening very much to strategists. So let’s understand what strategists are and what their business is. The business of a strategist is to get you to listen to them, okay? And they get you to listen to them, and they will spin some broad narrative about stocks and bonds and commodities, and other asset classes. It tends to be very top down and you make some overarching assumptions, and voila, there is your strategy and your allocation. And the problem with that is that you are reducing a world of thousands of stocks and individual prices, and inputs into this macro narrative.
Warren Buffett has an expression, “That forecasts about the future tell you more about the forecaster than they do about the future.” Yogi Barrett just said, “Forecasting is hard, especially about the future.” The point is, our ability to forecast the world in 12, 24, or 36 months is terrible, and if you’re making investment decisions as though you actually know how the world is going to go, you tend to make a lot of mistakes. And I’ve just found from my own purposes, it’s brain pollution, and I’m much better off spending as little time as possible listening to strategists.
What are economists and strategists missing right now?
Well, I know my economists pretty well, and the business of being an academic economist is to use linear regression analysis to forecast future trends and relationships. I think there’s a massive problem with that right now. The economy of the United States and of the whole world circa right now in 2023, bears more relationship to the world in the immediate aftermath of World War II than any normal business cycle type of analysis. So back in the late 1940s, you were dealing with demobilization following the Second World War. That meant you had this huge military industrial state that was being rapidly shrunk, a whole bunch of GIs coming home.
You had massive pent-up demand by consumers for various things. You also had a lot of new technologies that had been created during the war for manufacturing things for materials, in that case. The point is none of this was very conducive to a linear regression type of analysis, and we did have a statistical recession because you were doing less wartime stuff from a production point of view, but the economy very quickly morphed into something different. And that’s exactly the state of affairs that we find ourselves in now, post-COVID. The economy’s really only been normally open since the summer of 2022. Everybody knows about all the supply chain disruptions, don’t need to belabor that point, but it created extreme supply and demand imbalances. These are now being smoothed over. It is not surprising that inflation is coming down as a result of that.
Shifting gears to interest rates, there seems to be a growing consensus on the idea of higher for longer. What are your thoughts on this?
While I’m against strategists. There are two very basic thoughts that we are allowing to enter our collective brains here. One is a regime change in interest rates. So it is our belief, it is that the period from 2009 to 2022 was an anomalous period in the history of the world in terms of interest rates and having 0% rates at the Fed and other central banks, negative rates in some cases, and a lot of balance sheet mechanics as well. I think we’ve moved out of that into something very different. I’m not in the interest rate forecasting business, but a 10-year yield well into the 4% range says we’re not going back down to the zero to 2% range possibly ever in the next 10 years.
So there’s an expression that’s being thrown around in the market, “higher for longer”. I don’t love that expression. And the reason I don’t love it is it implies something, it implies eventually we’re going back down to the 2% or less range. Maybe we do, and if we do, I’m sure stocks will do just fine, but I’m not willing to make that bet. I think we’re in a different regime where you’re going to have a higher nominal cost of capital, possibly a higher real cost of capital, and that affects how you need to think about evaluation and so forth.
Obviously, there was already a lot of uncertainty billowing in the markets, but now you add on the conflicts in the Middle East to go along with the war in Ukraine. How does this type of uncertainty affect your approach?
I think, as it does relate to the Middle East, it’s a good example of why the philosophy of value investing matters. So value investing says, “I demand a margin of safety in my investments.” Now that margin of safety has something to do with price and the price that you’re paying for future cash flows. In our definition of value, it also has something to do with business quality and the structure of the market in which various companies participate in. That also protects you against the inevitable things that happen that are not predictable. So the only thing I can predict about what’s about to happen in Israel and the Gaza Strip is that we won’t be able to predict all the outcomes. That’s the anti-strategic prediction. So demand that margin of safety, understand that that’s important, and proceed from there.
So we sit here at the start of Q4 2023. How constructive are you with the markets now?
Part of being a value investor of any stripe, deep, classic, relative, QPD is what we call ourselves is you’re an omnivore. You’re willing to go wherever price, and market structure and business quality tell you that there’s something interesting to do here. And I think the beauty of active management in general and running a relatively focused portfolio, which we’ve always done. We don’t have to identify every single stock in the entire stock market that’s capable of going up, because that’s kind of a ridiculous exercise. We just need to be pretty good at identifying a handful that are going up that are underpriced and shouldn’t be priced where they are.
And sometimes that involves jumping on some controversial things. Other times, it’s just benign neglect. People are sort of disinterested in the moment in a certain company or a certain sector. Maybe it’s because they’re being driven by some macro narrative, or maybe it’s because they’re focused on something else, and that creates interesting opportunities. So that’s how I would look at it in a manner of speaking the noisier, the better, right? The more noise we’ve got going on, and I’d say we’re at an above-average level of noise, and it’s just going to keep getting noisier, means that there’s going to be more opportunities because people will, in a manner speaking again, do dumb things because they’re being driven by the noise.
And that’s a wrap for today’s episode of QPD Highlights. Before we say goodbye, a huge thanks to each and every one of our dedicated listeners. Your support means the world to us. If you’ve enjoyed today’s episode and found our tips helpful, please consider hitting the subscribe button so you never miss a beat. And don’t forget to leave your thoughts and comments. We value your feedback and are always eager to hear your questions and ideas for future topics. Until next time, thank you for tuning in, and we’ll catch you on the next episode.
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