VITALIY KATSENELSON, CEO and CIO of Investment Management Associates, shares his thoughts on predictions of a recession.
As I am typing this, I’m thinking about how much ink I should be spilling on writing about the recession and how much time we, as investors, should be allocating to thinking and worrying about it.
Firstly, our ability to predict it is very limited – the economy is a complex system and thus incredibly difficult to forecast. Don't believe me? The Federal Reserve employs a few hundred PhDs who stare at economic data 24/7 and they have yet to get it right, even once.
Secondly, recessions are not a death sentence to the economy but a natural, transitory phase.
Thirdly, and the most important observation: Time is the currency of life, and attention is how we choose to allocate this currency.
As an investor, I can spend most of my day fidgeting, spending my time trying to predict the unpredictable or invest as if, at some point (I don't know when), our portfolio will encounter a recession. Yes, earnings of some businesses will temporarily decline and then come back. Their stock prices may decline as well. But the value of the businesses, if we have done our analysis right, will not really change much. Recession – a temporary decline of cash flows – is a tiny blip in the stream of discounted cash flows.
"Don't tell me what you care about, show me how you spend your time."
There are three versions of ourselves: what people think of us, what we think of ourselves, and who we actually are.
We are at peace when who we think we are and who we actually are largely overlap. We are even more at peace if the two overlap in the version we'd like to be. We cannot really control what others think of us. The only thing we can do is to behave according to our values; but again, we should not tie our happiness to something we cannot control.
If you want to discover who you truly are, look at how you spend your time. If you are telling everyone and yourself, “I am a long-term investor,” but your daily attention is preoccupied with predicting and trying to avoid the next recession, then something has to change.
By the way, the above applies to many parts of our lives.