addressed the inflation elephant in the room in his speech to the Anika Foundation last week“Forecast misses of this scale should lead to soul-searching by forecasters, and they certainly have at the RBA. It is important that we learn from this and improve our understanding of the inflation process,” Lowe said.
At the heart of Marks’ view is the same issue Lowe and the RBA are wrestling with: how good are the models that lie at the heart of most forecasts?“To produce something useful – be it in manufacturing, academia, or even the arts – you must have a reliable process capable of converting the required inputs into the desired output,” Marks says.
In 2016, Warren Buffett told Marks: “For a piece of information to be desirable, it has to satisfy two criteria: it has to be important, and it has to be knowable.”What happens to the macro environment is obviously very important, but Marks and Buffett would say it is not knowable – at least not with the consistency that allows an investor “to gain a knowledge advantage and make superior investment decisions”.
Those in the former group are confident they understand what’s coming next, believe they can invest based on this knowledge and are happy to share their views.But the “I don’t know” school “generally believe you can’t know the future; you don’t have to know the future; and the proper goal is to do the best possible job of investing in the absence of that knowledge”.