Thursday, September 29 2022

Founder and Chief Investment Officer of Discipline Funds and author of the popular blog pragmatic capitalism, Cullen Roche sits down with The long view this week to share his thoughts on navigating the current market, macroeconomics, and the new Discipline Fund ETF.

Here are some excerpts on the role of macroeconomics and investor behavior from Roche’s conversation with Morningstar’s Christine Benz and Jeffery Ptak:

Macroeconomics and Financial Planning

Benz: You write a lot on macroeconomic issues. So where do you think the macro belongs, or perhaps more importantly, doesn’t belong in the financial advice and planning process?

Rock : So, to me, this is all very much about behavior. I think a lot of people study the macro, and they think they’re going to become like the next George Soros or Ray Dalio, and they’re going to use those ideas and beat the market and have some kind of high-fee type of mutual or type hedge fund allocation where they’re able to generate tons of alpha and that kind of narrative. While I consider the kind of opposite point of view that for me, macro is really about understanding the world as it is, so that when we navigate it, and encounter all the behavioral difficulties that are inevitable in the investment environments that we try to navigate so that we behave better, basically, because we feel more comfortable because we understand a lot of these big picture things, a lot of which are incredibly, incredibly confusing.

Can we prevent bad financial behavior?

Package: You mentioned the behavioral aspects. You know, one of the things that I think that comes to mind for Christine and I in hindsight is that people tend to dwell on macroeconomic issues as the pullback of 2020 s turned out to be the wrong time. I mean, based on your experience, running your practice and working with clients, are you okay with that and what proactive steps are you taking to try to counter some of that so that focus on developing good plans with you and sticking to them?

Rock : Yes, and a lot of it is based on education. I mean, for me, it’s not so much about understanding the world so that we can take advantage of these things in an alpha-generating way where we’re trying to be able to time the market or things like that. Really, for me, a lot of it is about being able to understand the world as it is so that we don’t misbehave. And I think one of the issues, particularly in the age of the internet, is that, to me, a lot of the financial media have an inherent conflict of interest in promoting viewpoints and stories that are inherently short-term. And a lot of that is based on emotion. It’s largely hysteria that’s based either on trying to drive eyeballs or in many cases layering, lots of misunderstandings about things and their causation and potential outcomes . And so, for me, a big part of macro is just understanding things for what they are so that as we try to navigate the daily trials and tribulations of the financial markets, we don’t get stumbled and prone to all these behavioral biases that can sometimes lead to really catastrophic errors for people.

“The Psychology of Money”

Benz: Do you think people have a higher propensity to fight the last war when it comes to macroeconomic issues compared to other types of issues that impact their financial success?

Rock : 100%. You know, Morgan Housel’s book psychology of money had a great take on all of this, where people tend to focus on the environment they’re born into, it’s the environment that shapes them, and it shapes their psychology of how they end up navigating the next 10, 20, 30 years of their financial life. And so someone who was born, say, during the Great Depression has a very different financial outlook than someone born in the last 10 years, for example. And so, I really think the tendency to dwell on the big, catastrophic mistakes of the recent past will shape people. And that’s helpful – one of the things that’s great about macro is that if you study the history of macro and markets in general, you can develop a better understanding of the probability than unusual things occur. And even if you were somehow born into a certain environment, the probability that the future will be completely different is extremely high on average.

Are investors waging the last war?

Benz: So where do you think investors are currently waging the latest war? What are the things that loom large in their psyche that, you know, were things that happened in the past that maybe won’t continue?

Rock : My God, I mean, we tend to see a lot of the same narratives in financial markets. People constantly think, for example, that – I mean, in today’s environment, for example, the last war that I feel like I’m endlessly waging is stories about things like the quantitative easing and the bankruptcy of the US government. And to me, those are stories that maybe have a shred of truth to them, but they’re based on huge, complex issues that I think people tend to overstate. And so, these are two of the greats that I constantly come across and kind of write about in a way I think stupidly repetitive just trying to add some clarity to how these things actually work.

Macroeconomics is generally very boring

Benz: We’re coming out of a decade where markets sort of shrugged off a lot of macro concerns and moved up. Do you think it’s cyclical, and the macro will become important again over time, or is it more structural?

rock: You know, it’s interesting. I mean, macroeconomics is generally very, very boring on average. I think Jason Zweig loves to talk about it on Twitter that if you wrote a really honest finance newsletter, you would basically say, every day, you would say something to the extent that some stocks went up, some stocks went down, not much happened, it was pretty boring on average. And that’s literally probably 98% of all macroeconomics happening in time. And so, it’s weird to think about how people think about macro, because macro tends to matter a lot more inside those very acute periods where generally you have a shock on the economy, and you have an event like the financial crisis, or let’s say, like the pandemic, that these things to a large extent are just kind of – at least the negative magnitude of their impact on the economy was very surprising and very fast, very unpredictable. And so, the macro still matters. I’d say that matters a lot more in some environments than others because, in my opinion, the potential for behavioral biases becomes so much more exacerbated inside specific shocking events than most of the time when things are just plain very boring.

This article was adapted from an interview that aired on Morningstar The long view Podcast. Listen to the full episode.


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