Even If You Knew The Future

What if you knew the future and you could position yourself ahead of it?

What if you knew in early 2022 that the fed was going to raise rates 11 times in a row? The cost of capital was about to skyrocket.

What if you knew in early 2022 that the 30-year fixed mortgage rate was going to rise from 2.8% to 7.3%. 18 months ago 35% of US households could afford a $450,000 home. Today 20% of US households can afford a $450,000 home.

What if you knew in early 2022 that Russia was going to invade Ukraine and disrupt energy and fertilizer markets.

How would you position yourself?

Short builders, short tech, short consumer discretionary, long energy, long fertilizer. 

What would have happened? The largest residential home builder in the United States, D.R. Horton, is up 5% in 18 months. Nasdaq down 12%. Consumer descretionary down 15%. Oil is down 18%. Fertilizer prices are down 25%. You got two out of the five right.

Even if you knew the future, you would still be mostly wrong. 

Even. If. You. Knew.

When Covid hit in early 2020, I quickly sold off the one stock in my portfolio I knew could be crippled by restrictions. 

I sold ClearPoint Neuro (CLPT) at $4.00 per share. It pained me to sell it. Michael Liu and I had just met with the CEO a few months prior. I really admired the company, the CEO, and unique roll they were playing in advancing gene therapies. I was right. The business was hampered, but I was wrong on the stock. The stock closed 2020 at $16.00 per share, +300%. 

The only stock I sold during covid was the one that went up the most. My reasoning was right, but the result was all wrong. 

There have been numerous other times in my investing career when I knew the business better than most. I knew through channel checks and scuttlebutt the company was going to have a couple weak quarters, and I knew the market wasn’t expecting it. I cut the position in half. What happens? The stock goes up 50% in spite of the mediocre results. Then I’m forced to rebuy the stock higher. My reasoning was correct, but the result was all wrong. 

In Chris Mayer’s book, How Do You Know?, he gives another great example from an article written by O’Higgins Asset Management: 

“Suppose that on January 31, 2006, you knew with certainty that the price of gold would more than triple over the next five years, from $569 per ounce to $1,900 per ounce. Knowing that, might you have invested in Newmont Mining, the world’s second-largest gold producer? Odds are high that you would have gladly bought Newmont Shares. What that kind of surge in the price of gold, buying in one of the world’s largest gold companies would seem like a no-brainer. Yet, the share price of Newmont fell 5% over that time.”

O’Higgins gave another example, “Suppose that at the start of 1973 you knew that the earnings of the Dow Jones Industrial Average would rise 50% over the next two years. Seems you would bet on the Dow, right? Well, the Dow was cut in half.”

Isn’t playing the short-term macro game such madness?

The way you handle the macro is to handle the micro. Find companies that can grow, earn more money, and not dilute you. Buy them at good prices and wait. The returns will come to you. Don’t get distracted by macro conversation or trying to pivot your portfolio based on where you think things are going. Even if you knew the future, it wouldn’t help you.

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