Morgan Housel

I respect Morgan Housel and enjoy his thoughtful articles. I’ve learned quite a bit from his perspective and thought this article… was worth calling out.

A couple of highlights:

“What Are You Trying to Predict?

“I’m fascinated with the problem of why really smart people have such a hard time predicting the future. It’s mostly because the future is more random than we think. But it’s also because future performance (like earnings and economic growth) doesn’t tell you half of what you need to know to predict future outcomes. Outcomes are determined by performance within the context of expectations… And if predicting future performance is hard, calibrating them against expectations… borders on sorcery.

“Even if you accurately forecast future performance, predicting the outcome from that performance requires answering two questions:

– Are current expectations reasonable?
– What will future expectations be?

“The first is possible to answer, but pretty hard… The second is even harder. To know where stock prices will be in five years, I have to know what mood people will be in, five years from now… Ask yourself what kind of mood you yourself will be in in May 2021, and you’ll shake your head in laughter. Ask what kind of mood seven billion strangers will be in in May 2021 — that mood, of course, will determine stock prices in five years — and it’s hard to keep a straight face.”

“It’s supposed to be hard. If it was easy, everyone would do it.” Tom Hanks, A League of Their Own. Great movie.

It reminds me how insanely difficult it is to pick winners at all, let alone outperform the indices. It’s humbling, and that’s valuable because it slows me down, makes me more reflective and helps me remember that my portfolio is not who I am. That makes it somewhat easier to avoid emotional investing decisions.

Thanks to everyone on this board for all the other help you’ve provided in the search for outperformance.

Best Wishes


No. The ‘mood’ analogy is charming but inexact and every one of Morgan’s 7B strangers is a straw man.

The question on the table is not mood but reversion to the mean in the dissolution of artificial supports.

For years on end the King of Ruritania went ever more heavily into debt in order to distribute gold coins to the richer members of the population of his country. The Ruritanian stockmarket went through the roof and everyone ate well and went to the seaside often. But then…

(Afterwards the Ruritanians became a little moody.)

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