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Welcome you are listening to watching the Financial Survival Network. I'm your host,
Carrie lets Well, in these times, you know, we're facing lots of
uncertainty. Are we heading for a recession? Are we heading for a global
financial meltdown? Is the dollar going to blow up? Will there'll be a
new reserve currency? What about crypto? All of these things? Well,
what we're talking about here is a new book that you need to get called
The Uncertainty Solution, How to Invest with Confidence in the Face of the Unknown.
I guess so the author is John M. Jennings with us. Now,
John, you're always to some extent investing in the face of uncertainty.
It's just that the brain, I guess. Our human condition is we look
for normalcy, and therefore we've got this thing called normalcy bias. But in
times like today, there is no such thing as normalcy bias, because nothing
is normal anymore. So you've got to have an approach, a discipline.
How do you invest in uncertain times? Yeah, but you're exactly right.
It's always uncertain. I mean, there's this old adage says now is the
hardest time to invest whenever here now is right. So when things are going
gangbusters in the economy and the stock market, people are worried about, oh,
you know, my investing. When things are too high, things are
too good, when things are bad or they can continue to get bad.
And then, yeah, you have uncertainty. You have you know Russia and
Ukraine, um, other Joe of political issues, you have you know,
the leftover effects of the pandemic. You have inflation. We had our hopefully
you know, banking crisis in the rearview mirror. But but who knows.
So yeah, tons, tons of uncertainty right now. But to your point,
that's always the case, and it's hard to find what normal is.
Um. So yeah, in terms of in terms of uncertainty. The reason
why we hate uncertainty so much as a species is because we've evolved to be
pattern recognizing machines, right, And the reason this is the case is if
you can detect a pattern, it gave us historically back in the day,
a survival advantage, right, because a pattern will tell you what's going to
happen in the future. If it's a persistent pattern, this is a huge
survival advantage. You know, is that you know is that Russell the bushes
does a pretend predator or prey. You know what is the migration patterns of
my own prey, whether patterns or those berries nutritious or poisonous. All these
things gave us a survival advantage. And so what happens is when we cannot
recognize a pattern, we get anxious, we get worried. It actually triggers
our fight or flight response, and we get all keyed up and we may
not even realize it's happening because of uncertainty. Then when we resolve the uncertainty,
the opposite reaction happens, the calming effect happens. We actually get a
dose of dopamine. It feels good. So it leads us with the following,
you know, dichotomy. We don't like uncertainty and we want to resolve
it, but when we resolve it, it feels good. So we are
constantly looking to to feel good. So it's part of the reason why some
people like to gamble. Right, you create uncertainty, then you have that
that dose of dopamine. It comes when it's resolved. It's why we don't
like to know the Indians necessarily of sporting events or books or movies, right
because we want to have that bit of uncertainty that's not threatening that we get
to results. So it's it's it's pretty complex, but the mean takeaway is
we don't like when we can't recognize a pattern, which is really the definition
of uncertainty. Okay, so basically we've evolved, we're modern man, but
all of the vestigial all of the evolutionary things that got us here are the
things that are tripping you up now. So I have that, right,
absolutely, we are we are modern. Are ancient brains living in a modern
world, right, Yes, So they're constantly triggered by non threatening patterns in
the great scheme of things, things like you know, the stock market and
the economy and things. I mean, they matter, but it's not being
threatened like being chased by a saber tooth tiger. Right. So, but
we're being chased by a saber tooth the central bank? Right, yeah,
exactly. So so how do you avoid the saber tooth and the central bank?
Yeah, well I'm not sure we can. I mean, like gets
some more you know, tactical and investment in investing uh anthems, you know,
really really the thing to do when faced with uncertainly there's a few things
to do. So instead of doing what we usually do, which is to
get keyed up and and and what we do is we you know, we
grasped the first explanation we can find that explains this supposed pattern we're seeing or
the lack of pattern. We we we grasped the first explanation and we defend
it um. You know, we turn to experts for predictions of the future.
Right, So, like if I were to say, right now,
what's going to happen with monetary policy and what's going to happen with interest rates?
Like your listeners would be like, oh that's great, Like you would
you would feel this sense of calmness or pleasure by having somebody And I could
give all sorts of data and reasons why I was giving my opinion, but
you know what, what study after study has shown and probably experienced this and
rey Is, experts, whether economists or investment managers or even political experts,
are atrocious at predicting what's going to happen in the future. So really it's
really hard. But turning off those expert opinions of what's going to happen in
the future is so important to successful investing. Like a lot of people think,
well, you need to know what's going to happen in the future to
invest well, and actually the opposite is true, because if you start with
you can't know. Therefore, thinking you know doesn't make you make better decisions.
Acknowledging your ignorance about the future and others allows you to invest in a
way that you know. It gives you a margin of safety or a moote
and you know, if anything, you can say, Okay, what happens
if you know, inflation continues to run high, what happens if it comes
back to a reasonable level, And then maybe what happens if we actually tip
into deflation. There's some people that think that over the next eighteen months deflation
as as big of a risk as you know, continuing high inflation and structure
your investments thinking I don't know. Here's a range of potential outcomes. How
am I gonna you know, and you know, how am I going to
wait these things? How I can invest based on that? So, you
know, we find that that's really a good way to go is turn off
those those expert opinions because they're just not you know, it's just not possible
to be correct. And like when you hear an expert give their views of
what inflation is going to be your monetary policy, I mean, go back
and say, what were they saying a year ago or what were they saying
kind of the you know, going into twenty twenty two. Did they say
that they thought that inflation was going to spiked? You know what it was
eight point seven percent? You know, did they predict that the Ukraine War
would happen? And if so, you know, fourteen months later or whatever
it is, it'd still be going on. I mean no, of course
not. So why listen to them now? Yeah, well that reminds me
what Peter Lynch said to taking the walk down the main street instead of Wall
Street. And he always said, yes, the dumb money isn't dumb until
it listens to the small money. Yeah, yeah, right, yeah,
And to your point, you get a lot of people you know, talking
their book, you know, so uh and I don't mean like their book
that they've written, but their book, their book of investments, right,
So yeah, so it's really it's really hard to set that aside. And
really the premise of my book in addition to you know, here's how we
usually respond to uncertainty and we hate it is what to do instead is acknowledge
that you're feeling uncertain. So that's really you know, a skill that you
can develop. Say I'm going to sit in my discomfort, so I'm going
to accept it. I'm gonna say I'm just going to feel uncertain. And
then what my book mainly hits on our thirty five mental models, So mental
models of model that you keep in your head about how the world works,
and you want to develop mental models they're actually based in reality, right,
And to create and what Charlie Munger, you know, Warren buff As business
partner, says, who's the champion of disconcept is you need eighty or ninety
of them that will carry most of the freight in making you what he calls
a world wise person. And you know which ones to pull out when.
So you create this lattice work of mental model. So I'll tell you of
one of the key you know, investmental models they discuss my book is one
that's called the stock Market is not the Economy. And what really boils down
to is this is that the stock market moves in advance of what the economy
is going to do. It's not vice versa. So what happens a lot
of times with investors if they look at things like, okay, we're maybe
injuring a recession, or unemployment is going to go up, or you know,
this is what's going to happen with you know, inflation or other economic
metrics GDP growth. They look at those sort of things and then say,
I'm going to use that to inform my investment decisions, when the opposite is
true. The stock market doesn't always get it right. It's you know,
it's you know, Paul Samuelson equipped that the stock market is predicted nine to
the last five recessions, right, But the stock market doesn't always predict it,
but it moves in advance of what the economy does. So you can't
use the economy to inform your investment decisions. And that is incredibly freeing as
an investor. It can take away a lot of the worry and then certainty
about what's going to happen in the economy, because even if you knew,
it wouldn't tell you when you should invest. And an example of when we
use this recently was in you know, March of twenty twenty, so when
COVID was hitting, we'd have clients that were very concerned understandably about COVID.
So this pandemic is going to be, you know, sweeping the globes would
be in the US, you know, what should we do? And we're
like, well, we know a few things, like as things as entire
industry shut down, as economy slows. And you remember that that chart even
the Wall Street Journal in New York Times that showed unemployment claims, you know
they usually run around two hundred thousand. That jumped to like kind of like
four million or something that we just it was just mind boggling. But we
use that investment mental model with our clients to say, the economy does not
predict the stock market. Therefore, we should not make investment changes based on
what we think the economy is going to do, because even if we knew,
and we do know some things, it's going to get worse. It
doesn't tell you when the stock market is going to do. So we actually
had a lot of clients that rebalanced from bonds into stocks in March, and
then you know, the stock market rebounded way in advance of things getting better.
We saw that a new eight oh nine. You know, it happens
time and time and time again. And so that's an example of like one
of the mental models of the book. And you can see how like if
you if you study this, if you you internalize it as an investor,
how it can really help you in the face of uncertainty because you say,
we have all this a certainty, uncertainty in the economy, and you could
say, I don't need to know what the economy is going to do,
because if I did know, it wouldn't tell me what the stock market is
going to do. Right, So that's just one of the you know,
the thirty five mental models in my book. Okay, I'll buy it.
I've heard it said that when you're thinking of an investing you should not be
looking at the news because it's the cycles that determine the news, not the
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you need to throw now more than I do. I do, And it's
it's interesting. Um, I wrote an artist and I have a section of
my book on on you know, market cycles, because that's obviously you know
some very important mental models around market cycles. And one of them to know
is, you know Hyman Minsky, who was an economist that died nine six,
but moment, the Minsky moment. So the Minsky moment is a huge
thing to know about. And you know, really, I think the big
takeaway from Minsky is it's it's the financial instability hypothesis is that sometimes recessions or
market cycles are triggered by external shocks, like you know, the pandemic,
for instance, was an external shock, or the oil crisis back in the
seventies was an external shock. But often the economy shows the seeds of its
own destruct by actions that are taking you know, by risk seeking, you
know, businesses and investors and things. And so really, if you step
back, times of seeming stability end up being the riskiest time to invest,
and the times of the greatest instability because of the cycle end up being the
best times to invest, even though the opposite feels true. Right, So
the thing to keep in mind with the the you know, i'll call it
the Minsky cycle as financial and stability hypothesis is, you know, you'll see
things that are happening in the economy where people are taking on you know,
more risk and you know um risk, and we saw it with the banking
system. So all these banks took on an incredible amount of interest rate risk
by investing in treasury securities and you know, with mismass maturities, with with
their deposits, you know, taking more and more risk that was uncompensated.
Right, so they were getting you know, one and a half two percent
yields on these bonds. Uh, you having their money locked up and not
being compensated for it. And really, what the Minsky cycle tells you as
you start seeing those things is that there will be a moment where it has
a huge catalytic result. And we saw that with bank And again maybe we're
through that with what the you know, the FDIC and the FEND the Treasury
have done. But we don't know what those actions will cause in the future,
right, you know, they put out maybe they put out this fire,
but it's like suppressing you know, it's like suppressing force fires. We
found that that's not always a good idea, right because then you have bigger
force fires layer. So that's just part of the uncertainty is you know,
what were their actions to put out this fire? The best thing to do
in the long run, or was it more destructive we have a bigger force
fire later time will tell. I don't know. I don't either. I'm
the first to admit it to my future telling predictions haven't always been that great.
A lot of times. I've been in sync other times enough. But
clearly, when the pandemic occurred and they started throwing money at everybody and anybody,
I knew that was going to be major inflationary as bad as a war,
and certainly it was. Yeah, and I acted accordingly. It was
a great financial time for me personally because I didn't I wasn't in a job,
I wasn't in a business that was shut down by the government. But
like you said, to some extent, we're reactive creatures. It's really hard
based on that biology to you know, we're on the horizon looking for the
sabretooth tiger is going to attack us, but we're not necessarily seeing what's behind
us, who's creeping up from behind, and it might might be a lion
that's coming after us, right, you know, that's exactly right. And
and again I think you know, a key message in my book is that
to be a successful investor you don't need to predict the future. Well,
and the reason is it's not possible to predict the future. Well you're right,
sometimes you're you're wrong the others and um that that there's again it's it's
about making it's about making good decisions in the face of uncertainty and knowing what
to base those decisions on, to base them in lessons, you know,
wise, lessons from reality rather than based on emotion, where you know,
some prediction that you've you've read and you can just look at the big investment
banks, you know, year to year. So for for about a decade,
I've kept track of the you know, the the predictions that you know,
the Golden Sacks is, Morgan Stanleys Shape, Morgan's Bank of America,
you know, all them, you know, make of you know, what's
going to happen in the coming year in the markets. And it's completely laughable
that they continue to make these predictions. Um, you know, their predictions
on GDP growth and what the stock market is going to do, you know,
growth versus value, you know, and Nashville versus domestic all these things
are you know, worse than chance basically, and how they they end up
turning out and you know when you you know, I have these situations where
I'm at conferences or no people and you end up having a drink or two
at a bar, and I'll say to you know, some of these chief
investment strategies and some of these other institutions, you know, why do you
continue to make these predictions when you know you're really um, They don't really
add any value, if anything, they hurt. And the number one answer
of the ones that are more, you know, area died. I would
say, you know, there are some things like oh no, I'm great,
I'm like really, but most of them say, you know, it's
really what the clients demand, like my clients, you know, or the
clients of our firm want us to tell them what we think is going to
happen. So we tell them, even though we're often wrong, we tell
them. And you know, as I detail, you know more. There's
all these psychological reasons is humans. One of the main ones is over confidence.
Why we continue to make predictions or have strong opinions about things even when
we've been wrong over and over and over. You know, one thing that
I've started doing, you know, personally years ago, is keeping a decision
journal so when it comes time to make a decision, I will say,
you know, here's the issue. Here are my possible What I see is
my possible decisions I could make, and then I go ahead and do it.
And then I will go back, you know, months and years later
and look at here's the decision I made. How did it turn out or
wrong? It's up? Yeah, yeah, it can be very humbling,
you know. Yogi Barrett once said, prediction is very hard, especially about
the future, and we got to accept turmoil, uncertainty, chaos. That
is the norm, the new norm. But it's not really that much different
than the old norm, Hey, is it? John? If we want
to find out more about you besides buying your book, which is the uncertainty
solution, how to invest with confidence in the face of the unknown, how
do we connect with you? Website? Twitter? Yes, my website is
pretty easy, is John ms? And Jennings are ms and Michael sorry then
Jenny, so John m Jennings dot com. Very very simpler and so it's
my personal website and linked to my book more about me linked term. So
yeah, that's that's what we uh going Verry, And if you have a
question for John, shoot me an email kl at Kerry Lutz dot com.
There'll be a link to John's site in the show notes to this interview on
Financial Survival Network dot com. Make sure you sign up for your free newsletter.
John very interesting, compelling, and we appreciate you coming on. We'll
talk to you again. Thanks for having me a ton of fun. Thanks
for listening to Carry Letts's Financial Survival Network, your solution to today's trying times.
For the latest, go to Financial Survival Network dot com. Financial Survival
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