This post was originally shared on my eToro feed in February 2023. Make sure to follow me there as well, and did you know that you can copy my trading there for free? Create an account today, copy my portfolio by searching for user “Allseasonsport” to automatically copy the trades done in my All Seasons Portfolio strategy effortlessly.
Since I joined eToro in 2021, I have been sharing insights and observations about investing with risk balanced strategies such as the All Seasons Portfolio strategy which I blog about here. As eToro is a social trading platform, I from time to time share content directly in my eToro feed, which I then share on the blog in posts like this.
The legendary credit investor Howard Marks (founder of Oaktree Capital Management) wrote an investor memo titled “You Can’t Predict. You Can Prepare.” in 2001.
Although more than 20 years have passed since these words were written, the message is almost eternal for investors.
The memo can be summarized as follows: if you are dealing with the future (rather than just looking at the historical data), you should have great humility in trying to predict anything at all.
This may seem like a contradiction for investors, as the purpose of this profession is to make money and achieve good returns based on what happens in the future. Fundamentally, it’s all about more or less qualified guesses, probabilities, and the discipline to ensure that you get paid for the risks you take.
However, according to Howard Marks, it can help to have an understanding of where you are in a cycle, as these tend to repeat with some regularity. Although it’s not a perfect indicator, it increases the probability that you won’t be completely wrong.
To apply the memo’s title in practice, one should know what drives asset prices.
In addition to endogenous factors such as a company’s own value creation, the price of assets is driven by the two main exogenous factors of the rate of economic growth and the inflation rate. In particular, surprises (events that the market did not expect) for these factors lead to changes in asset valuation.
For example, if the economy grows more than expected, this is positive for assets that are sensitive to growth, such as stocks, because increased activity leads to better opportunities to sell products and services, which benefits shareholders.
Similarly, if inflation increases more than expected, this is negative for stocks, due to increased costs (reduced margins), while customers have less consumption capacity.
Regardless of whether we’re talking about endogenous or exogenous factors, these are very difficult (read impossible) to predict over time with reliability. Guessing about exogenous factors also requires getting two steps right: first, hitting how macroeconomic factors will change, and then being right about how the market will price the changes.
The probability of consistently succeeding as an investor in this endeavor and regularly making money over decades is vanishingly small. This is why, as a capital manager, I constantly come back to the title of Howard Marks’ memo, even though the memo was written from the perspective of a credit investors. Still, the words ring at least as true for a diversified macro-oriented portfolio.
You can’t predict. You can prepare.
This means that instead of trying to invest in a way that requires predicting future developments, it’s better to construct portfolios that perform well regardless of what happens.
A successful investor knows better than to waste energy and transaction fees speculating about events that are difficult to predict the effects of, instead of building a portfolio that is long-term viable and that performs steadily in all climates.
This investment philosophy is an important part of the core of my All Seasons Portfolio.
Rather than having excessive exposure to only one exogenous/macroeconomic environment (such as a pure equity portfolio) or trying to predict that a certain such environment will occur, the all-weather portfolio has been prepared to perform well in all combinations of rising/falling economic growth rates and inflation rates.
This is achieved by allocating to all such macro climates based on the risk contribution of different asset classes rather than allocating equal amounts of capital to all macro climates.
Through risk-balanced diversification, more stable and predictable portfolio returns are achieved over time, as there is always something that performs well. In this way, we diversify away a large portion of the macro risk and instead retain the excess return from each asset’s risk premium.
Thanks for your attention, and I hope you enjoy these occasional updates and insights about mechanics of my strategy.
You are more than welcome to stick around for this journey that I have been on for several years already with this strategy, and I look forward to interacting with you along the way. And make sure you look up my profile on eToro, if you haven’t already by searching for user “Allseasonsport”.
All the best,
The opinions shared in this article are those of the author and do not constitute investment advice in any form. Any mentions of my trading strategy are for descriptive and information purposes only of what I do with my money. All investments carry the risk of capital loss.
This post includes affiliate links for eToro, and by clicking the links, I may get a compensation, at no extra cost or disadvantage for you. On eToro, the trading on my account is done with my own money, and if you choose to copy my trading, I have skin in the game and incentives to stick to my strategy and perform well.