Global Investing

CHAPTER 5Market Cycle Risk

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In an ideal world, investors and policymakers would have perfect foresight, enabling them to accurately predict future events. Central bankers would predict the actions of consumers and businesses and proactively implement fiscal and monetary policy that generated a steady level of economic growth while keeping inflation contained. Business leaders would anticipate changes in demand for their products and services and adjust output accordingly to grow their earnings at the highest possible rate. Investors would precisely forecast future corporate earnings and thereby accurately determine the fair value of each company.

Unfortunately, reality is nothing like this. No one can predict the future with any certainty. At best, we can make educated guesses of what may come, where the probability of being correct is hopefully greater than 50%. Even the most rational decision-maker is subject to the whims of the infinitely complex world we live in. In the words of Howard Marks, “[t]he reason for this—as I've harped on repeatedly—is the involvement of people. People's decisions have great influence on economic, business and market cycles. In fact, economies, business and markets consist of nothing but transactions between people. And people don't make their decisions scientifically.”¹ Does not being able to foresee all possible events or know the probability of events occurring or the eventual impact they will have on our investment portfolio ...