Year End Reflections

Programming Note:

You’ll still get a transcript of next week’s podcast episode, but this will be the last Random Words newsletter for 2023 as Jason and Jeff will be taking next week off. See you in January!

Jason’s Random Words

I realize I promised last week that I would write this week about how my investing process has changed. I'll write about that sometime in the future. Probably January. 

Jeff and I just released our annual "Reckless Predictions" episode, featuring three of our favorite investing and podcasting friends. If you haven't listened to it, I encourage you to do so. And if you haven't listened to last year's episode, I think you should do that, too, and before listening to the second part of this year's episode. I'll wait while you do that. 

Back already? That was fast. If you actually did this homework, you probably noticed that everyone had a lot of conviction in their predictions. And as Jeff and I discussed at the end of last week's show, that conviction didn't change the fact that most of our predictions were just flat wrong. The right ones were, by and large because they predicted an outcome that was the way things were most of the time already. 

Broadly speaking, this gets to the heart of why most predictions are wrong. They're precise guesses about complex things at a specific point in time. This is a terrible way to predict with any degree of accuracy. You're throwing darts at a target strapped to a half-drunk unicycle rider on a trampoline. On the back of a herd of wildebeest on the verge of a stampede (or a giant group nap. Who can tell?). 

To paraphrase the wisdom of a 10th-century Prussian military officer, no prediction survives first contact with the real world. When you involve people in a system, millions of different inputs and outputs, goals, timelines, fears, wants, needs, and incentives are at play. 

In short, chaos. 

This makes most financial predictions objectively hard and useless. Partly because almost nobody can actually predict anything like the economy or other macro things objectively, but mostly because the inputs and outputs are so incredibly complex. They're useless – worse than useless since they actually cause us financial harm if we act on them. 

But they're fun! And I think the predictions that we make and that we gravitate to, can also be a useful Rorschach test. They don't so much tell us what's going to happen, as they tell us how we think and feel. Which is, generally speaking, a product of our own biases, fears, desires, and incentives, and not an objective expectation based on the data. Oh, sure; we almost certainly will use data to make the prediction. Or more accurately, using cherry-picked, relevant data to support the prediction we most expect to see. 

And if predictions are broadly useless, how we feel about them is decidedly valuable. If there's one thing I have learned from my own mistakes, and that's backed up by the data, it's that the biggest detriment to most people's financial returns and wealth building is themselves. We are good at messing up a great thing. Understanding yourself – the greed, fears, biases, incentives, and expectations that drive your actions – and having frameworks and a plan to restrain your worst tendencies and unlock your superpowers, is worth 10 times as much as the best stock tips you'll ever get. 

Jason

Jeff’s Random Words

I’m glad Jason wrote about the Reckless Predictions show that was released yesterday because I want to focus on the episode you’re going to hear next week, our 2024 Portfolio Contest reveal. I don't want to give anything away, so I want to share some thoughts on the 2023 portfolio as well as the whole idea of one-year stock-picking contests in general.

First, let’s talk about the 2023 portfolio contest. We’ll do a proper review of the year sometime in January when the final statistics are calculated. However, with only a few market days remaining in the year, Jason’s portfolio will certainly be the Q4 and full-year winner considering the substantial lead he has at the moment. So let’s start there. What does this mean? Is Jason the world’s best stock picker? The short answer is an emphatic “no”. To be fair, I guess the more charitable answer to that question would be “I don’t know, as me again in 20 years” because that’s the only way we’ll know.

Remember that this was a contest we did for 3 reasons. First of all, we thought it would be fun. In case you haven’t noticed, we like to have fun. Secondly, we know that people like to listen to us talk about stocks. This gave us a structure to do so throughout the year. Last but not least, we hoped it would lead to some charitable giving. I should also add that there was an unexpected outcome to the contest. It ended up being a perfect real-world example of how and when to use all the frameworks and tools in our collective toolboxes as we watched the crazy market fluctuations throughout the year.

Ok, back to Jason’s (lucky) portfolio. Crowdstrike killed it this year, and I think that was to be expected. Trex had an average, if not disappointing year, and yet it has also crushed the market. If you recall, Jaon picked Lemonade as a “moonshot” and while it has only slightly beaten the market so far, it certainly has not been a drag like it could have been. Any one of these could have gone the other way in 2023. Let’s not forget that.

Trust me when I say this is not sour grapes. I’m choosing to write about Jason’t portfolio because he would say the same thing I am. This was luck as much as skill. But here’s the point of this whole post. None of us should take any of this too seriously. Here’s one more example. I played two one-year portfolio contests in 2022. I chose 5 stocks for each contest. Check out my amazing (sarcasm) results: 

• Portfolio 1: Down 47%

• Portfolio 2: Down 61%

As you might imagine, I did not do well in these contests. But I kept tracking. Take a look at each portfolio’s returns as of this past Friday’s market close:

• Portfolio 1: Down 27%

• Portfolio 2: Down 4%

Yes, these are still both losing portfolios, but consider how well they had to do this year to improve by this much. All I did was wait another year. Time in the market. 

So next week we’re launching a new (more fun, I think) portfolio contest. We’ll talk about a bunch of new stocks, declare “winners” each quarter, give to charity, and bust the chops of the losers. But what I am most looking forward to is looking back at the 2023 portfolio contest. What might that look like after year 2? Or year 5? Or year 10? The 2023 contest taught me unexpected lessons and I have a feeling it’s not done teaching me yet.

Jeff