Expectations are the things that are comfortable to speak on TV while not causing a riot and losing your job. But investing is about betting against what is comfortable to speak on TV.
Recently, it has been comfortable to expect high inflation,
A year ago, it was comfortable to expect another market crash.
A year before that, it was comfortable to expect a recession.
It is comfortable to say ‘things have become crazy’ and blame this or that for your money losing trades. Yes, someday you might turn out to be correct, but will your portfolio still have those trades? And if yes, will the gains make up for all the money lost?
Being contrarian is not the same as being unpopular. Today, it is quite popular to say ‘market is going to crash' and although that’s contrarian, it’s also comfortable. For years, Value investing was both popular and contrarian, until it finally stopped being popular. Popular and comfortable becomes expectations. Expectations are already priced-in. Tomorrow’s market moves will be caused by surprises to the popular and the comfortable.
It is easier to detect an unpopular view than a correct one. Try telling some of your colleagues that you think the market is about to double. Now, tell your other colleagues that you think market is about to half. Which statement feels more comfortable? Which one gets more nods? The more comfortable, the more popular. The more popular, the more it’s already priced in. The more priced in, the less money you will make even if you are directionally correct.
If you decide to invest actively, look for the uncomfortable first, and only then decide if you have any edge in predicting the odds of it happening.
Stocks for the long run in the portfolio is uncomfortable.
Long term bonds as a hedge to the market is uncomfortable.
Following a model and eliminating impulsive trading is uncomfortable.
Large periodic deviations from the 60/40 are uncomfortable.
Investing on day 1 - no dollar cost averaging, no waiting until the market corrects - is uncomfortable.
Not having a popular answer to your client’s questions about the near term market outlook is uncomfortable.
Ignoring the news, the fears, the regrets and holding on ‘no matter what’ is uncomfortable.
Yet this is how we invest in our multi-asset approach. Betting on the uncomfortable unlocks the upside of future surprises that cause popular and over-crowded trades to unwind. And the irony is that the longer we do it, the more comfortable it becomes - and the less comfortable the ‘popular’, ‘comfort-seeking’, ‘narrative-biased’, ‘consensus-seeking’ ‘expectations-based’ investing becomes.