That’s why they’re called surprises (Howard Marks – Expert Opinion)

Expert Opinion, the latest memo of Howard Marks is once more an interesting read.

The reasoning throughout the memo resonates well with me since I believe it is worthwhile for a (discretionary) money manager to:

  • (try to) understand the economy
  • (try to) figure out the expectations embedded in the market
  • bet small most of the time
  • bet bigger when there are extremes in the market

Figuring out what is priced into the market was also mentioned by Adam Robinson in a recent Tim Ferris podcast. Check out It doesn’t make sense to find out more about it.

The memo gives several so-called Expert Opinion examples ranging from politics to sports. In a brief video available at the Oaktree website, Howard Marks explains the issue with expert opinions through the New York Post’s “NFL Bettor’s Guide”.

[…] virtually none of the eleven experts’ overall picks added value after fees (sound familiar?). Even the average of the experts’ “best bets” wouldn’t have produced a positive return after fees. […]

He then continues with 4 (macro) questions he hears all the time (are even more the last couple of years). The answers in Italic basically summarize his reasoning as an investor.

  • What month will the Fed raise interest rates?

How would I know, and why do you care?

But more importantly, why would anyone care?  If I say December, I ask them, what actions would you take?  And if I changed that to March, would you do something different?  The idea that you would do something different with a March expectation rather than a December expectation ignores the likelihood that the expectation of a March rate rise would begin to be reflected in asset prices well before March.  That means the likely date of a rate rise is not a very useful piece of information. 

  • What could go wrong in the economy or the market?

The truth is that while I can enumerate them, the obvious candidates (changes in oil prices, interest rates, exchange rates, etc.) are likely to already be anticipated and largely priced in.

It’s the surprises no one can anticipate that would move markets most if they were to happen.  But (a) most people can’t imagine them and (b) most of the time they don’t happen.  That’s why they’re called surprises.

The greatest single influence of the last three years was doubtless the 75% decline in the price of oil from June 2014 to February 2016.  But who predicted it?

  • What inning are we in?

First of all – admittedly I’m being picky here – people rarely specify which game they’re asking about. 

But, more importantly, the question assumes we know how long each game will go on. 

So rather than “what inning,” I’d suggest investors ask whether things are or are not in an extended state.  Is psychology depressed, average or euphoric?  Is the capital market shut tight, normal or unthinkingly generous?  These are questions that can be answered in a helpful way, not how close the game is to being over.  No one knows the answer to the latter.

  • And in each country I visit, how’s the outlook for that country?

I’ll add that being experienced as an investor and even hopefully intelligent says nothing about being able to divine a specific country’s macro potential.

After I  spend a day or two in a country, people often ask for my conclusions.  But in the course of my visits, I generally (a) visit only big cities, (b) meet only with financial types, and (c) spend more time answering questions than gathering information.

To finish, towards the end there is another really good paragraph. Maybe some readers will ignore it, but I believe it is the essence of a good investor:

[…] Everyone at Oaktree has opinions on the macro. And when we see extremes in markets and, especially, capital market behavior, we’re apt to take strong action. But we’re highly aware of what we don’t know, and when conditions are moderate or indistinct, we don’t bet heavily. […]