Without precise definitions you end up in forecast hell

Topic: Imprecise definitions lead to useless models and conclusions

Discussion: If you’re performing macroeconomic research, which inflation are you talking about, which growth, which interest rate? The answers to those questions can be of crucial importance for your eventual investment outcome.

Length: Short — maybe 5 minutes reading time

Teaser: It’s easy to predict the weather. Not to mention stock market returns

PODCAST TIP: listen to my latest podcast episode (#6) on Future Skills with philosopher Alexander Bard. We talk about definitions of infantile grown-ups and much much more. Check it out on iTunes here, or your favorite Android app here.


Dream Warriors

Are you dreaming about making perfect economic forecasts, and using them for producing amazing equity investment returns? How does this sound to you:

Weather and production bottlenecks in combination with monetary policy induced growth are starting to cause higher commodity prices. Inflation is already showing in their wake. People worry about rising interest rates, just take a look at OIS spreads. Some central banks are turning less dovish. Higher interest rates means less funds for investments, lower growth, lower profits and lower share prices. Higher interest rates mean lower bond prices, higher borrowing costs, lower real estate prices among other things. Higher inflation means money loses its value. And this time it’s at a time you can’t hide in stocks or bonds. You could hide in gold. One bar of gold is always one bar of gold. Maybe that’s why the gold price in dollars is rising (despite obvious manipulations and jaw-boning from various authorities).

Does the above fit your view? Higher commodity prices => higher interest rates => sell stocks, bonds and real estate and use cash to buy gold and soft commodities, until the cycle turns again?

Well, hold your horses for just a little while.


What’s your definition of a boombastic jazz style?

Which commodity prices are you talking about exactly, when you say their prices are rising? Wheat, hogs, orange juice? Iron ore, coffee, cacao? Silver, cobalt? Platinum, palladium?

Similarly, which interest rates are you referring to? The Fed funds rate? Treasury bills, longer term bond market rates? Corporate bond rates, bank lending rates (to consumers, to corporate clients, to house builders?), peer to peer lendning rates? Intrabank market swap rates?

Oh, I almost forgot, “inflation” you said. Would that be the (ever manipulated and ever changing) CPI measure? Or the PPI gauge? Input our output PPI? How about house price inflation numbers? Or energy price inflation? Avocado prices?

My point in this post is that if you don’t clearly define exactly what variable you are talking about it becomes exteremly difficult to make any kind of coherent analysis, not to mention draw any practical conclusions whatsoever from the exercise. Macroeconomic research is difficult enough as it is without averaging everything together, whether it be “the inflation”, “the interest rate”, “the oil price”, “the stock market” or “GDP”.

Take that last one, e.g., GDP. What does Gross Domestic Product really tell you? What conclusions can you draw from it even if you knew its exact trajectory going forward a few quarters? How about nominal GDP vs. real GDP (using which deflator measure?), or GDP per capita? Then there are data series for wages, wage growth, hours worked, hourly wages, lost jobs, added jobs, seasonal adjustments (many orders of size larger than the actual net number), employment (measured in at  least three different ways depending on, e.g., how to define somebody without a job, based on whether he’s searching for a job or doesn’t care).

And what’s so special about GDP growth by the way? There’s zero useful correlation between real GDP growth and stock market returns. How about a house price recession like the one that began in 2006, several years before the ‘actual’ recession. Don’t even let me begin to talk about the NBER’s definition of a recession (no it’s not “two quarters of contracting real GDP”

 

“a significant decline in economic activity

spread across the economy, lasting more than a few months,

normally visible in real GDP, real income, employment, industrial production,

and wholesale-retail sales.”

 

No matter the problems of making macroeconomic models work at all, you don’t want to make it even harder by using impractical and vague definitions. My message in this post is that you need to make sure your definitions are practical and at least theoretically can lead to better decisions.

After that we can talk about the ephemeral character of macroeconomic causations and correlations, not to mention their flimsy associations with actual stock market behavior.

For now take this with you: Knowing what you know and knowing what you don’t know, is paramount in uncertain environments. And the financial markets are as uncertain and stochastic as they come.

Thus, make sure you do define all concepts and ideas about their connections precisely. That’s your only chance of keeping track of what you know and what you don’t. In addition, it’s your only fair chance of creating a feedback loop of increasing knowledge and strategy adaption.

Such directed or deliberate practice is in similar fashion your only chance of coming out on top in the arguably most competitive sport known to man (and yet untrained newbies gladly step into the ring and bet their life saving’s on themselves).

Today’s advice holds true for everyday life as well. I don’t know how many arguments with friends I could have saved, had we only defined the concepts and words precisely at the outset…


Stock market forecasts coming up

I’ll soon write a follow up on this article, where I’ll explain how stock market returns can be reliably forecast in much the same way as the weather can be accurately forecast. For now this teaser will suffice:

Just as I know there’ll be snow in the middle of Sweden on quite a few days every year between December and February, and almost completely certainly no snow 99 per cent of the time between June and August; a highly priced market will produce very low rates of return, and a lowly priced will produce high rates of return over the coming decade or so. But more detailed notes about next time and the exact implications for the current situation. Stay tuned.


FUTURE SKILLS: Don’t forget to check out the super energetic conversation with Alexander Bard on Future Skills Ep. #6! You’ll find it on iTunes here, or your favorite Android app here.

 

Two incredible tools for sustained growth: “why” + Commonplace

Topic: Are you stuck on the nearest hill? How do you even know? Finding out what your alternatives are, what you actually want and how to get it starts with why.

Discussion: How to make sure you don’t squander your life, or your investment returns

Conclusion: Question more. Do it systematically. Get to the root. Adapt.

?


Why?

That word might be the very thing separating humans from animals.

OK, for the record, I don’t think there is a clear separation between “humans” and “animals”. I think intelligence, emotions, curiosity, consciousness, cumulative culture etc. are manifested along a spectrum in all living things.

I do, however, think that humans are orders of magnitude ahead most animals in some respects, such as when it comes to asking questions like “How?” and “Why?”

It’s the hows and the whys that got us technology, which in turn has given humanity a form of abundance of food and leisure that most animals don’t. It’s not all good of course, since evolution has taught us to eat all the calories we can lay our hands on, while spending as little energy as possible. We evolved for energy-hoarding “Netflix and chill” behavior (as in actually chilling in front of a movie with a bag of chips, but, sure, we have evolutionary drives of other kinds too). But what we need is novelty and exercise.


My whys are about maintaining Future Skills

Almost everything I do these days is centered around understanding and countering evolutionary mismatches, and staying relevant just in case.

To be clear, here’s the situation:

I had a rewarding career in finance to say the least. Then I quit when I had enough money to live comfortably for the rest of my life. The problem is that living comfortably might mean too little physical and mental challenge to stay healthy. In addition I don’t trust fiat money or even the conceptual system of working in one period for “tokens” and relying on others doing the work for me in the next period in exchange for said tokens. In particular not over longer time periods.

The above means I need to keep investing both financially and personally in order to stay relevant and secure in a changing world. That’s why I keep risking my money in various ventures, as well as read, write, listen and record — in essence learn and teach.

Sure, I would still work out and do sports, not to mention read books and listen to podcasts, even if I didn’t worry about becoming unhealthy and ignorant. And I probably would do some investing too, just because it’s fun to be involved in interesting projects or simply to help people realise their ideas. I wouldn’t, however, as I do now, manage dozens of investments, projects, blogs and podcasts at the same time. Sure, I wouldn’t call it “work”, but the fact is that I’m never idle.

I’m not complaining. Not at all. On the contrary, I’m doing exactly what I want. It’s just a little surprising to myself what it was that I wanted.


Ask why, answer, and change accordingly

Alright, enough with the soul searching. What’s the takeaway for you?

The most important tool for moving forward I’ve come across is the question “Why?”. It’s even better in multiple form, such as the Five Whys:

Ask yourself why you do something, and then why that is, and why again until you get to the actual root of the matter. Do the same with reality, events and people around you to map your surroundings and put yourself in the relevant context.

In order to benefit fully from the power of why you probably need a way to organise your findings too. That’s where the commonplace comes in handy — that’s just an old word for a structured notebook where you keep track of all your ideas and findings in a systematic and searchable form.

Start with your most fundamental whys: why you live where you do, why you work where you do, why you see the people you see, why you eat what you eat and do what you do. Try this:

Make a table in your commonplace and fill it out with answers to why, gradually over time as you are hit by inspiratons (an elusive elementary particle):

  • Work (help people, stay relevant)
  • Live (friends, environment, infrastructure)
  • Travel (see new things, change, break)
  • People (interesting, challenging, fun)
  • Consume (just the bare necessities)
  • Eat (nutrition, health)
  • Do (blog, write, record, read: see Work)
  • Study (exciting, brain health, curiosity)
  • Exercise (health, vanity, fun)
  • Invest (fear, fun, challenging)
  • Social Media (contribute, networking)

Then ask how you could do it differently, better, tailored to you. Keep adding snippets of information and clues to answers to those questions in your commonplace Know Thyself file, until you know enough to start transforming your life from what just happened to take shape to what you actually would design from the bottom up (within the bounds of all kinds of individual, worldly limitations of course).

If asking why is your most valuable friend; availability bias, ownership bias, loss aversion and homeostasis are your worst enemies. They are all variations of a theme that anchors you in place, making you climb the nearest hill instead of the best hill. Searching and replacing that default state takes effort and courage, and the potential rewards aren’t now but in the future.

Maybe, just maybe, you’ll conclude that you’re already exactly where you would be anyway. Wonderful! Alternatively, you might find you should and could change dramatically. Also wonderful! (albeit scary).


If you’re an investor there are whys for you as well

Maybe you’re not ready for life-altering decisions. Maybe you’re just an investor that came across this post unknowingly, and your answer to why you invest is simply “to get more money”. Well, the principle is still good:

Why do you hold the assets you do? Why is that valuation metric important? Why would the growth rate be x%? Why would that push the stock price higher? Why do you think it’s not in the price already? Why would A and B change the way they need to in order for your investment to pan out as planned?

Make it a habit to at least once a year pretend you’re starting from scratch and question every single holding in your portfolio and their premise and actively try to find better alternatives.

I’m not sure which is harder, giving up on old holdings or old habits.


The feeling of freedom

My whys made me give up high finance in exchange for dog walks, podcasting and writing, but I still live in the same apartment and go about my days much the same as before. The only true difference is that instead of spending my days in an office researching stocks, I’m sitting alone in my home office on the one hand learning and expressing myself, and on the other making sure I could get a job if needed.

Another difference is the concept of “freedom”. I could do whatever I like. The only consequence would be a theoretical loss of relevance in the future. As long as I know I’m “free”, I’m happy confining myself to a small room and an internet connection.

That seems to be what I really needed, just the feeling of freedom.


Future Skills

Now, what about you? Do you have your whys in order, whether for the big picture or just your investments? Start taking notes, slowly but deliberately mapping your actual life and comparing it to your desired life.

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In my podcast Future Skills (link to iTunes to listen to and rate the show) I and Ludvig talk about strategies for achieving the best possible life experience. We talk about tools and habits for enhanced focus, creativity, health, finances and happiness, in order to prosper in a world of accelerating change.

We talk about self-knowledge, about breaking homeostasis and about circumventing irrational biases in short format episodes, and provide inspirational conversations with masters in their field in longer format episodes.

Do you know what you want and how to get it?

No? Don’t worry, most people don’t. In Future Skills we explore that space together, on a quest for ever better methods and practices to foil our evolutionary mismatches.

Check it out on iTunes or any Android podcast app of your choice.


P.S. Please rate or review Future Skills to help make more people find it

Subscribe on iTunes | Subscribe on Android

What if I told you there is a GREEN pill?

Do you choose blissful ignorance in a gilded cage (blue pill)?

Or painful truth and “freedom” in the gutter (red pill)?

Well, which is it?


Pills and bills

What if I told you there is a green pill?

There exists a place on the interwebs where truth is served without hesitation, but where you’re simultaneously encouraged to make your stay in whore village as short and rewarding as possible.


Push!

This green pill enclave teaches you to push your competency, push your abilities, push your targets, push your income, push your returns until you become WSP worthy. But it doesn’t end there. Making millions is important, but making billions is just plain stupid and a waste of your most precious resource – time.


Wall Street Playboys

WSPs teach how to make money, how much you should be making, what skills you need, how to prioritize, when to learn, when to experiment, what friends to keep, when to party and so on. WSPs tell you if you’re heading in loser direction, WSPs tell you if you need to, and how to accelerate, what risks to take.

And then they tell you when you’re done. If you can’t relax, if you can’t play, if you can’t enjoy yourself in the surroundings of your choice, the company of your choice, in a strong and healthy body with an alert mind then you are a loser to no matter how much material wealth you’ve got piled up.

The red pill lands you in a tent and on a yoga mat, which is interesting in your 20s, weird in your 30s and leads to premature death in your 70s

The blue bill leads to middle management and a quiet suburb


The green pill fills up your bank account, your muscles and your brain in your 30s, and releases you as an independent and intelligent alpha in your 40s, free and capable of doing exactly what you want.

The green pill place is called Wall Street Playboys and you’ll find them right here (P.S. buy their book EFFICIENCY; the book is in effect the green pill)


Many ways to Rome – Future Skills

Still here? If Wall Street Playboys‘ web site and book are the literate versions of the green pill, my podcast Future Skills is the audio version. With three different kinds of episodes I and Ludvig aim to provide the tools you need to be prepared for accelerating societal and technological change. We talk about:

  • How to learn more efficiently – metacognition and learning about learning
  • What to learn – methods, mindsets, skills
  • Where to invest your skills and resources for maximum returns – psychologically, mentally, financially and physically
  • How to identify and achieve your desires to enjoy your personal and financial investment returns

Check out our green pill podcast Future Skills and leave a much appreciated rating on iTunes or Stitcher.

Again, a quick rating on either place means more people get to make their life greener. We would appreciate it very much. In addition a review is your ticket to a competition throughout April 2018. Read more here.