Imposters and Uncertainty

I just recently started playing chess again with an old friend. We’ve had a good five year break, but we’ve been playing together since high school. Chess is good for your brain but can be bad for your ego. If someone sees you playing chess, they may think you’re a smart person. Little do they know how very wide the spectrum is from novice to super grandmaster. There are 400 possible positions for all of those pieces after each player has moved one time. There are roughly 3.25 billion different game configurations that are possible by the time each player has moved 7 times. Those numbers only go up from there, but the very best players will know how unimportant those numbers really are, because in most cases, the majority of those positions would probably be composed of bad moves.

It is still a very humbling game. Me and my friend usually play slow games, with plenty of room for conversation. We like to talk about everything, but we are both really interested in dorky science stuff. Our last conversation had to do with governments monitoring social media using artificial intelligence, leading us to discuss the state of quantum computer technology, which led us to a discussion of quantum mechanics and the viability of fusion as an energy source in our current energy crisis. I know that sounds like a really nerdy conversation, but it, along with chess, sets the stage for the subjects of this letter… uncertainty and the imposter syndrome.

Quantum physics gives us the uncertainty principle, which says you can’t know with certainty both the position and the speed of a particle. The more you know of its speed the less you know of where it is, and vice versa. This is basically true for any object with wave-like properties. Well, forgive me if this is a loose association, but the investment markets are wave-like. The faster the price of the market overall moves, the less sure we can be about the actual value of the underlying investments. The more certain we are of the underlying value of those investments, the slower the markets will be and the less likely they are to move quickly.

We probably have more macroeconomic and investment uncertainty today than we have had in decades. No one needs me to list all of those big inputs again. But, all of that uncertainty also leads to uncertainty in our own lives. We have a lot more room for doubt today, including in ourselves. The imposter syndrome, which has been studied for years, is when someone feels inadequate despite a track record of competence. Most prior studies were focused on women, many of whom experience this feeling after breaking the glass ceiling and finding themselves in top leadership. However, imposter syndrome has been found to affect all types of people, across all achievement spectrums.

There’s a well-known story on the subject by the prolific science fiction writer, Neil Gaiman. He was at a big celebration for great artists, scientists, writers, and discoverers. He was at the back of the crowd talking with another man named Neil. Neither understood why they were being celebrated. The other Neil (Armstrong) said, “I just look at all these people, and I think, what the heck am I doing here? They’ve made amazing things. I just went where I was sent.” That gave Mr. Gaiman comfort… “I felt a bit better. Because if Neil Armstrong felt like an imposter, maybe everyone did. Maybe there weren’t any grown-ups, only people who had worked hard and also got lucky and were slightly out of their depth, all of us doing the best job we could, which is all we can really hope for.”

Well, the past five years have led to an increase in people experiencing imposter syndrome. From investment advisors, parents, religious devotees, kids, investors, teachers, and health-care workers… the uncertainty and self-doubt gunks up all of our lives. But we still keep going, and we are almost always better prepared and making better decisions than our tested faith would have us feel. When you think about chess, there are those people who at least know the rules and how the pieces move. Those people are hands down better at chess then the people who don’t know those basics. When it comes to investors, we may not all be hedge-fund managers. But the people who understand the basics are hands down better off than those buying dreams sold by fraudsters.

I am hopeful that we will soon get a little lessening of the uncertainty that is gunking everything up. The mid-term elections are just around the corner. I’m not scared to add a little politics here, because I’m upset with all the politicians out there. The track record and evidence available to me tells me that a great extent of our current leaders, on all sides, are serving their own interests more than the interest of we the people. Big fixes for the current failures of our leaders are probably not an option anytime soon, but… if Republicans take enough seats in the House, it could lead to gridlock. Hobbling their ability to pass new laws and make big changes would give us a couple of years of less uncertainty.

This should be advantageous in the current struggle to sort out the big inflation problem. I could go into a grand discussion on where the current inflation comes from. It would involve Friedman and his Quantity Theory of Money, M2, and the velocity of money, but I’m guessing most of your eyes have already glazed over from that one sentence. In summary, and as many of you already know because you have voiced it yourselves, there is too much money out there. And almost all of that extra money came from both the government and the Federal Reserve (fiscal and monetary origination). We do not need more money pushed into the system. If we can get gridlock from the election, our lawmakers will hopefully be limited in their ability to spend more new money. Then, over time, the excess money will get absorbed into the normal workings of the economy, which should cause inflation to come down.

But until then the idea of recessions and bear markets loom. Here are some history and figures that will hopefully reduce a little of our fear of uncertainty and our strained confidence. However, and I don’t mean to be a downer, but I must mention – history should only be a guide for planning. I would never use historical averages as a way to convince anyone that the future will be a given, especially when it comes to the investment of your savings, which is why we are conservative in nature.

1. The Presidential Cycle – Years one and four of a president’s four-year term have average returns for the S&P 500 (+6.7% for both). The second year shows the weakest average return (+5.8%). The third year has a significant lead over the other three years, with a historical average of +16.3% return.
2. On average, the S&P 500 reaches its highest point seven months before a recession begins and reaches its lowest point four months before a recession ends. Recessionary periods have often been good opportunities for investment.
3. The S&P 500 has risen an average of 1% during all recession periods since 1945. Of the past 30 recessions, 16 have had positive stock market returns, even while seeing an average GDP decline of -3.0%.
4. Positive stock market return recessions have lasted an average of 16 months and have seen an average positive return of 9.8%. Negative market return recessions have lasted an average of 18 months and have seen an average market decline of -14.2%.
5. If you wanted to try to limit the downside recession markets by switching between stock investments and cash, you would have to correctly time 77% of those market changes to outperform someone who did not try to make market-timing changes. In other words, if you were going to be wrong any more than one out of four of your future predictions, it is better to hold steady.

If I could predict the future correctly three out of every four guesses, I would be held up on my own private island somewhere. I do not have that power though. However, I believe once market volatility slows down, people will be better judges of what underlying investment values are, and what will then be revealed are bargains. So over time, more and more people will be buyers. It may be that they will just want to own a great company that has been discounted. Or it could be that they will want to buy a very attractive dividend yield created by the downward market swing, but eventually greed and hope will overpower fear and despair, and the cycle will begin anew. We will continue to try our best to keep both of those emotional bookends in check, find bargains, and position our overall allocations for the future.

We are here answering your phone calls, and our doors are always open to you.

Justin Anderson