Narratives Are Just Short Cuts

A narrative can be defined as a particular way of explaining or understanding things. It is a type of shorthand communication used to simplify and clarify that which is complex and opaque. Narratives are commonplace in the investing world. Investing is hard work – why not take a short cut here or there?

Narratives are just that: short cuts. Consumers of narratives use them as substitutes for their own research and critical thinking. The more widely-disseminated the narrative, the more believable it becomes.

The obvious problem with narratives is validity. Says who? On what basis? Assumptions versus facts? Who stands to benefit? I could go on. Narratives used to predict future events must, for obvious reasons, be discounted. The dark side of narratives is that they can be deliberate misrepresentations, used to deceive and manipulate. And rarely is anyone held to account.

No Recession. Hmmm.

When we invest, we purchase something today for EXPECTED benefits in the future. When we create financial plans, we utilize ASSUMPTIONS about the future: earned income, rates of return, tax rates, inflation, etc. What role do narratives play in these functions? (More than you realize.)
Financial industry professionals at all levels face tremendous pressure from consumers who demand answers. Market strategists, financial analysts and economists are paid to explain and predict. Financial advisors, who I would describe as wholesale consumers of the narrative work products, accept or refute, process, and disseminate the information to retail consumers.

Something I have learned over the years is to question narratives and, specifically, consensus views. For example, a December 2022 Bloomberg survey of economists placed the odds of recession in 2023 at approximately 70%. No recession – the consensus was wrong. The current consensus for 2024 is no recession. Hmmm.

The Most Truthful Answer is: “I Don’t Know.”

Contrarian investing is a type of investing strategy that goes against consensus or prevailing sentiment. Warren Buffet summed it up as follows: “Be fearful when others are greedy, and greedy when others are fearful.” (Warren knows a thing or two about investing!) What is popular? What’s out-of-favor?

The price you pay for an investment today is an important determinant of your future returns. Today’s most popular, widely owned investments may be overpriced, indicative of future underperformance. Conversely, unpopular investments may be underpriced, indicative of future outperformance.

There is a famous proverb as follows, “in the multitude of counsellors there is safety.” Seek advice. Financial advisors, inclusive of investment, tax, and legal professionals, are the front-line defenders against bad narratives and incomplete information decision-making. Oftentimes, the most truthful answer is: “I don’t know.”