What Harrison Ford can teach you about investing and living in a radically unpredictable, low investment return world.
In this episode you’ll learn:
- What is the primary narrative driving markets today.
- What are the two things that never change with markets.
- What is positive and negative carry.
- Why central banks implement negative interest rates.
- How low are interest rates around the world.
- How do we invest and live in a radically unpredictable, negative carry world.
Harrison Ford Flies Again – Men’s Journal
George Soros – “I’m not expecting, I’m observing”
What Tools Does the Fed Have Left? Part 1: Negative Interest Rates – Ben Bernanke
Ben Hunt’s Epsilon Theory – Hobson’s Choice
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Navigating an Unpredictable World
In early March 2015, the actor Harrison Ford decided to take his vintage World War II open-cockpit, single engine plane on a twenty-minute flight over Southern California. After a careful preflight check, Ford took off from the Santa Monica Airport.
When he reached 1,100 feet, the engine died. All he could hear was the wind. Ford radioed the control tower at the Santa Monica Airport to request an emergency landing. It quickly became apparent that he would not make it back to the airport.
Instead, Ford maneuvered the plane toward the Penmar Golf Course in Venice, California. He clipped a tree and then crash landed the plane.
Ford woke up five days later at the Ronald Reagan UCLA Medical Center. “My first question was, ‘Did I kill anyone on the ground?’” Ford told Men’s Journal Magazine. He couldn’t remember the crash.
“I knew I wasn’t going to make the runway so I was going to the golf course. What I regret more than anything I don’t remember the maneuvering, what decisions I made, after I decided I was going to the golf course.”
“When the engine quit, my training had prepared me to deal with it in a way,” said Ford.
“I really didn’t get scared. I just got busy. I knew what I was going to do, and I knew how to do it. The mantra aviators carry around in our heads is: Fly the airplane, first thing. Fly the airplane — even if it doesn’t have an engine, fly. Don’t give up that ship, matey. And even though I don’t remember the details of it, I guess I was able to do that, because the way I landed, the wings were level. I didn’t stall it. I’m here.”
In the crash, Ford suffered a broken pelvis and ankle along with a head laceration. He has fully recovered. When Ford faced this perilous situation with an unknown but potentially fatal outcome he went back to the basics. He just flew the airplane.
As investors trying to navigate our financial lives we also face an unpredictable and at times perilous future. The investment and economic landscapes are as unpredictable today as anytime in history.
Because the level of complexity and interconnectedness among markets, economies, investment instruments and participants has never been higher. More and more trading is done automatically by computer algorithms.
At the same time, central banks around the globe have never been more active in trying to influence economic and market outcomes. Many of the interventions such as quantitative easing and negative interest rates have never been tried previously.
There has also never been more focus by market participants on trying to deduce what central banks will do and what the results will be. The prevailing narrative driving markets is market outcomes are the result of central bank policy either for good or ill.
My concern is what happens when the narrative changes and investors stop believing in the effectiveness of central banks and in their ability to influence market outcomes. Harrison Ford faced his life threatening situation by focusing on what he could control.
He adjusted the flaps and maneuvered the controls to keep the wings level even though the engine wasn’t working as he glided toward the golf course. What can we control in our own financial lives as we navigate through a radically unpredictable world?
Save More, Spend Less
First, we can save more and spend less. In a world of low to negative interest rates, the power of compounding is subdued. Asset class returns are lower, which means investors have to save a higher percentage of their incomes than ever before. We can save more by generating more income and by spending less of it.
One of the creative challenges of our times is to figure out how to spend less while maintaining satisfying, rewarding and productive lives. In other words, how do we live richly but on less money.
Second, our portfolios should be more diversified than ever before with multiple return drivers. That means not just public investments like stocks and bonds, but private investments like our own lifestyle businesses, real estate, education, gold and gardening. We should invest both globally and locally, including in acquiring new skills.
We should focus more on asset classes and less on trying to beat the market by investing in individual stocks.
Minimize Our Maximum Regret
A final strategy to deal with a radically unpredictable world is to “minimize our maximum regret.”
Ben Hunt, Chief Risk Officer at investment firm Salient Partners, describes how to do this: “One exercise I find useful is to think of different future scenarios for the world (not because I’m trying to predict which one will happen, but precisely because I can’t) and then consider how my current exposures and strategies are likely to fare in those futures.”
“My goal isn’t to figure out the scenario where I think I’ll do best, because then I’ll start hoping for it and consciously or unconsciously will start to assign a higher probability of it occurring, but to figure out the scenario I’ll do worst.”
Once we identify worst case scenarios, we can protect against them. We do this all the time by purchasing home, auto, health and life insurance.
We can pay down our debt and keep debt balances low. We can also have a greater margin of safety in terms of emergency savings.
By saving more and spending less, increasing our investment diversification and minimizing our maximum regret, we can better navigate an increasingly unpredictable and complex financial terrain.
283: Why You Should Care About Carry Trades