In his latest investor letter, Legg Mason mutual fund manager Bill Miller takes aim at the likes of Marc Faber who think all of investing can be boiled down into some simple concept like: big debts = big trouble.<\/p>\n
—-<\/p>\n
Mathematician Don Saari has noted the tendency for one or two variables to dominate
complex systems with many more variables that need to be ordered, to the exclusion of the
rest. In the complex adaptive system that is the stock market, that means there will be
dominant narratives that most everyone agrees with and that seem to provide pat
explanations for what has happened and predict what’s likely to happen.
Greedy bankers taking outsized risks caused the financial crisis, is an example. Another is
that the large U.S. current account deficit, a result of chronic over consumption and under
saving, means the U.S. dollar will continue to weaken. Still others are that China and the
other emerging economies’ rapid growth will drive commodity prices higher, or that an
over-leveraged consumer will lead to a “new normal” of subdued growth and lower-than-
expected stock market returns. Finally, the only way out of the immense deficits of the
government and the bloated balance sheet of the Fed is through inflation.
These narratives take highly complex, tightly coupled, interdependent systems and collapse
them into a simple story that explains and influences behavior. Eyeing the deficits, Marc
Faber in Barron’s this weekend concluded, “We are all doomed.” Well, maybe, but
probably not this year, which ought to be a good one for stocks. <\/strong><\/span>
At LMCM we are no different from others in that we try to understand the environment
and make investment decisions based on information, analysis, and judgment. Where we
differ, though, is that we don’t make forecasts and conform portfolios to those forecasts,
nor do we have theories which tell us what will be, or must be, as a result of what is or
appears to be the case. We are data driven and try to observe and understand what the data
seem to indicate, and leave the theories and predictions about what will or must happen to
those with privileged access to the future. We do, of course, have beliefs that shape and
influence how we interpret and weight the data, but those beliefs are in the form of
provisional hypotheses, constantly subject to reformulation and change as the evidence
warrants. <\/p>\n