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On My Radar: Be Different and Ok With Being Wrong

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Aug 26, 2022
By Steve Blumenthal

“Anyone who thinks there’s a formula for investing that guarantees success (and that they can possess it) clearly doesn’t understand the complex, dynamic, and competitive nature of the investing process.”

– Howard Marks, Oaktree Capital Group, LLC

A short post this week. I’ve finished writing early today so that I can join Susan and her Malvern Prep high school soccer team at their game. By the time this email hits your inbox, Susan will have a better feel for what she’s got.

At the last minute, her assistant coach quit, and she asked me if I could help. I promised I’d make a few practices each week and as many games as I can. My ask? One navy blue Malvern Prep shirt, one white Malvern Prep hat, and that she be ok that every answer I give her beings and ends with, “Yes, coach.”

It’s an exciting time of year with plenty of optimism for a good season ahead. Grab your coffee and find your favorite chair. Next, you’ll find some outstanding investment advice from Howard Marks. Howard is humble, balanced, and generous with his wealth and his wealth of knowledge. I encourage you to share it with your children and grandchildren. Especially the part about not being afraid to be wrong.

Also, I want to introduce you to the On My Radar audio page on Spotify. More on that in the Personal Section below. And speaking of podcasts, I came across a podcast conversation between Lex Fridman and Ray Dalio. I downloaded it to my iPhone and listened to it on my flight to and from Detroit this past week. When my colleague Avi and I deplaned in Detroit, we both had earbuds plugged in and were fully engaged.

Halfway to the rental car area, I looked at him and asked, “Podcast?”

He smiled and said yes. “It’s an NFL preseason discussion, and it’s really good,” he said. “What are you listening to?” he asked.

“A Ray Dalio interview,” I replied. He just rolled his eyes. I just can’t get enough of this macro stuff.

Dalio explains the importance of identifying the global macro landscape, the different stress points, various advantages and disadvantages, the important players, and their behavioral tendencies, all in an effort to position himself and his client’s wealth. More than $150 billion in wealth. He shares his thinking and his study of 500 years of history and concludes that humans tend to make the same mistakes over and over again. · You’ll find the Lex Fridman Podcast – Ray Dalio:, Power and the Collapse of Empires conversation worth your time… Lex asks thoughtful questions, and I really like how Ray warmed up to Lex.

I’m not sure about you, but I’m really getting hooked on podcasts. On a walk, in the car, on a train, and on a plane. I’ll be downloading a few for the long flight to Vancouver tomorrow. Going fishing in British Columbia. More on that is below. Please let me know if you have a podcast recommendation or two. And follow me on Spotify, Twitter @SBlumenthalCMG, and LinkedIn.

Howard Marks – Ok With The Potential of Being Wrong

I recently read Howard Marks’s recent memo titled, “I Beg to Differ”

He gave some great advice for all investors, and as I read his recent missive and I kept thinking about my kids. Brie, Tyler, Matthew, Kyle, Conner, and Kieran.  Essentially, he said, “in order to achieve superior returns in the investment world, you have to be different and be okay with the potential of being wrong.” According to Marks, your thinking and risk appetite must be different from most everyone else, and you must consider investing in things others have not piled into.

He went on to discuss various levels of thinking in the investment world:

  • First-level thinking: very simplistic, superficial, and everyone can do it, i.e., “The outlook for the company is favorable, meaning the stock will go up.”
  • Second-level thinking: deep, complex, convoluted. I.e., What is the range of likely future outcomes? What outcome do I think will occur? What’s the probability I’m right? What does the consensus think? Is the consensus psychology that’s incorporated in the price too bullish or bearish?

And he left us with a handful of golden nuggets:

  • Readily available quantitative information with regard to the present cannot be the source of superior performance. After all, everyone has access to this type of information.
  • Anyone who thinks there’s a formula for investing that guarantees success (and that they can possess it) clearly doesn’t understand the complex, dynamic, and competitive nature of the investing process.
  • At extremes caused by the investment herd (like bubbles or crashes), it’s essential to act in a contrary fashion. If the extreme highs and lows are excessive and the result of the concerted, mistaken actions of most investors, then it’s essential to leave the crowd and be a contrarian… just because no one else will jump in front of a Mack truck barreling down the highway doesn’t mean that you should. In other words, the mass of investors are not wrong all the time or wrong so dependably that it’s always right to do the opposite of what they do. Rather, to be an effective contrarian, you have to figure out: what the herd is doing; why it’s doing it; what’s wrong, if anything, with what it’s doing, and what you should do about it.
  • Adopting winning strategies is inherently intertwined with the possibility of losing
  • Most great investments begin in discomfort… bargains are usually found among things that are controversial, that people are pessimistic about, and that have been performing badly of late.
  • In addition to superior skill, successful investing requires the ability to look wrong for a while and survive some mistakes.

Concerning money managers and portfolio performances, Marks says, “Rather than taking capital away from underperformers, clients should consider increasing their allocations in the spirit of contrarianism (but few do). I find it incredibly simple: If you wait at a bus stop long enough, you’re guaranteed to catch a bus, but if you run from bus stop to bus stop, you may never catch a bus.”

  • One quarter or one year’s performance is meaningless at best and a harmful distraction at worst

Sage advice from one of the greatest investors of our day.  You can find his full letter here.

My dear friend Mark Finn gave me some advice a number of years ago.  Mark is a consultant to large pension plans and endowments. He has one of the sharpest investment minds I know.  He told me I will never get all the information I feel is necessary to make a decision. We, humans, want to take in everything we can know, but there is so much we just can’t yet know. What we can know is this:

  • Is the market opportunity the company is going after really big?
  • Do they have a unique edge in technology or science, or product?
  • Is the intellectual property protected?
  • Is the management team competent? Are the people around them competent? Do they have a pathway to funding to help them grow?
  • If the size of the opportunity they are going after is so large and they have good management and access to funding and a good shot at winning even a portion of the opportunity, then you’ve got a good bet.

Later, when a company goes public, there will be so many analysts following the stock that you will have access to as much information as you can want, and that may make you feel more comfortable, but by that time, you will own what everyone else owns and it will be more difficult to gain meaningful wealth from the bet.

SB here: We will always be uncomfortable when it comes to making a decision.  I think what holds most people back is the need to be right. In investing, you must not be afraid to be wrong.

Trade Signals: Jackson Hole

Market Commentary

August 25, 2022
S&P 500 Index — 4,199

Notable this week:

Notable this week:

“Once inflation goes above 5%, it has never come back down without the Fed Funds Rate exceeding the CPI.”
– Stanley Druckenmiller

That quote doesn’t mean Stan is right, but would you bet against him?
The annual Fed get-together in Jackson Hole is this week. The world will be zeroed in on Chairman Powell’s Friday speech. Hopes for Fed pivot face the cold reality of inflation north of 8%. The Fed’s self-imposed target is 2%. It appears to be a long way away.
My friend David Rosenberg pointed out, “True fundamental lows in the stock market tend to occur after the last Fed rate cut, not the first one — the rally after the pause and the rally after the first easing are always head fakes.” Source Breakfast with Dave (August 25, 2022). There will be a lot of up-and-down volatility on the path to even the first-rate cut. It could be different this time though I personally have strong doubts.
Whether the next hike is a 50-basis-point or a 75-basis-point hike, it’s still a hike. The current Fed Funds Rate is 2.50%. If Stan is correct and inflation won’t come down until the Fed Funds Rate is higher than the Consumer Price Index, the Fed has more work to do. Let’s assume inflation drops from 8% to 4%. We are still looking at three more rate increases to get the Fed Funds rate above that number. Keep Rosenberg’s knowledge of market cycle history top of mind.
Student Debt: 3-Year Loan Payment Moratorium?
Adding to Chairman Powell’s challenges, yesterday, President Biden said that he will cancel $10,000 in federal student loan debt for borrowers making under $125,000 a year or couples making less than $250,000 a year. Those who receive federal Pell Grants and make less than $125,000 a year would be eligible for total forgiveness of $20,000. But the cherry on top of the whipped cream that sits on top of the two scoops of ice cream is the nearly three-year loan payment moratorium. Student-loan forgiveness raises long-term inflation and budget risks. The 10-year Treasury yield moved back above 3%.
A little bit of good news on the inflation front: One of my favorite indicators is NDR’s inflation timing model. It looks at the year-over-year change in the CPI. The model consists of 22 indicators that primarily measure the various rates of change of such indicators as commodity prices, consumer prices, producer prices, and industrial production. The model totals all the indicator readings and provides a score ranging from +22 (strong inflationary pressures) to -22 (strong disinflationary pressures). High inflationary pressures are signaled when the model rises to +6 or above. Low inflationary pressures are indicated when the model falls to zero or lower. The model score fell to a zero reading at the end of July, signaling low inflationary pressures. It is way too early to tell but it’s moving n the right direction. We’ll keep our eye on the trend as other forces remain in play…e.g, Student Debt: 3-Year Loan Payment Moratorium? Inflationary!
The Dashboard of Indicators follows next. More red than green except for high-quality bonds.
Click HERE to see the Dashboard of Indicators and all the updated charts in Wednesday’s Trade Signals post.

Not a recommendation for you to buy or sell any security.  For information purposes only.  Please talk with your advisor about needs, goals, time horizons, and risk tolerances.

If you are not signed up to receive the free weekly On My Radar letter,
you can sign up here.

Personal Note – Red Wine / Great Leadership and Big Fish

I really liked a recent post from Admired Leadership. Maybe it is because it contained a story about an unconventional winemaker, and by now, you know my love of red wine. I thought I’d share the short piece with you:
Innovation Requires Irreverence
Not long ago, winemaker Sean Thackrey hosted a sommelier at his California vineyard to taste some of his latest wines. When he asked his visitor what he thought of the wines, the sommelier replied that the wines didn’t taste like they were supposed to.
Thackrey, who had been making wines for more than 40 years, asked his guest what he thought the wines should taste like. “A Pinot Noir should taste like a Pinot Noir and a Cabernet Sauvignon like a Cabernet Sauvignon,” came the reply.
Thackrey leaned back in his chair, smirked, and said, “Why do they have to taste a certain way? Because some French wine ponce 300 years ago said Cabernet should have cherry notes, or this wine should have this particular taste? Why not take what the vineyard gives you and make the best wine you can possibly make and not worry about the flavors. Just make the best wine you can with what you have.”
The pursuit of creating the best with the ingredients at hand is something all great leaders share. Complaining about the people, resources, or funds and waiting for the right situation to materialize is not what real leaders do. Instead, they use the talent and assets they have to create the best possible outcome. It is always easier to lead when revenue and resources are readily available. Leading and creating excellence with limited resources is what great leadership is all about.
Often described as a pioneer and unconventional thinker, Thackrey personified innovation in a field where copycats rule the landscape. He recently passed away at age 79, but is remembered by one admirer as the “unapologetic winemaker.” Innovation in all disciplines requires unapologetic leaders. Who knew irreverence was such an essential leadership quality?

Source: Admired Leadership – sign up here to get their free Field Notes

Tomorrow, August 27, I fly to Vancouver and spend the night there. Then, I’ll fly a puddle jumper to a remote island, then helicopter twenty minutes to the shores of Haida Gwaii (formerly The Queen Charlotte Islands), British Columbia, on the northwest coast of Canada, just south of Alaska. The destination is the West Coast Fishing Camp, where John Mauldin, Jim Tosti, and I will spend four days fishing for king salmon and halibut.

The flight home is next Friday, September 2.  I see a fun time with friends, great fishing, and some fine red wine in the near future.

On My Radar is on Spotify

Son Kyle recently graduated from Penn State and is trained in voice, theatre, writing, and directing. He’s moving to LA in a few weeks to follow his passion. As a dad, I can find all the reasons to tell him an investment in that business is a long shot, but it would go against everything I’ve shared with you today from Howard Marks about investing. I’m really excited to see what Kyle creates next.

I’ve been thinking about doing a podcast for several years. Good friend Jan VanEck, ETF giant and OMR reader, told me he had a one-word piece of advice for me, “Podcast!”

Like I have the time to do it, I thought to myself. But Kyle approached me with an idea, and with his help, I’m going to take step one toward following Jan’s advice. We set up a Spotify page, and the idea is to create an audio version of each weeks On My Radar.  We’ll focus on the high points, and you can always look back to read the full letter.

Additionally, I’m going to bring conversations with some of the most important investors/thinkers in the business to you. The first will be an upcoming conversation with my friend and partner John Mauldin where we’ll dive deeper into where we are along the path to what he calls “The Great Reset.”  John’s best guess is we hit the reset point in 2028, but it really is just a guess. I’m of the belief that we will print and default our way out of the mess, we’ll increase taxes, and I think we are going to have to reduce the size of or delay the start of Social Security, Medicare, and pension benefits. We baby boomers won’t like it, but we are pretty much responsible for this mess.

There is a solution for everything. We just need enough of a taste of what we don’t want to motivate us to create what we do want. The Great Reset is the point in time when we are forced to fix it. 

Here is a link to the audio recording of last week’s On My Radar: Boomed Booms and Slumped Slumps, or click on the photo. You can follow me on Spotify, and we’ll also provide a link each week via Twitter and LinkedIn. Given the tight timeline to publish each week’s letter, there will be a few days of lag between the OMR post and the audio post on Spotify.  Please, please, please let me know what you think.

I want to wish you a great week and a fun end-of-summer-long Labor Day weekend. There will be no On My Radar next week.  I’ll share a few pictures with you the following week. Hoping to catch a few big fish.

Thanks for reading!

Steve

Stephen B. Blumenthal
Executive Chairman & CIO
CMG Capital Management Group, Inc.

If you are not signed up to receive the free weekly On My Radar letter,
you can sign up here.

Forbes Book – On My Radar, Navigating Stock Market Cycles.  Stephen Blumenthal gives investors a game plan and the advice they need to develop a risk-minded and opportunity-based investment approach. It is about how to grow and defend your wealth. You can learn more here.

Stephen Blumenthal founded CMG Capital Management Group in 1992 and serves today as its Executive Chairman and CIO. Steve authors a free weekly e-letter entitled, “On My Radar.” Steve shares his views on macroeconomic research, valuations, portfolio construction, asset allocation and risk management.

Follow Steve on Twitter @SBlumenthalCMG and LinkedIn.

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