The week of the US election is the perfect environment for investors to make unfathomably difficult forecasts about financial markets with entirely unjustifiable levels of confidence. These could be about anything from identifying which equity market sectors might benefit from a particular outcome to forewarning a rout in US treasuries. Making decisions based on such prognostications is a wretched idea. This is not just because of the difficulty inherent in any given prediction, but because for it to be worthwhile investors have to keep getting such calls correct over and over again. The chances of this are slim and the downside severe.

When considering the type of investment decisions we want to make we need to ask ourselves not only about the likelihood of being right about a specific circumstance, but of being consistently more right than wrong in similar situations through time.

This is the challenge that resides at the heart of making bold macro calls or attempting to aggressively time financial market movements. While we might be fortunate with a view in a certain instance – how likely is it that we will overcome the odds and keep doing it?

No investment decision is ever made in isolation. We always have to consider: what comes next? Let’s imagine that we forecast a recession and an equity bear market – even if we are right, will we continue to be so? How deep will the downturn be? When will it end? What will the recovery be like? Each situation has its own unique set of complexities and uncertainties, which means that even if we strike it lucky once, we must repeatedly answer incredibly difficult questions. It is never one and done.

It is not even sufficient to be more right than wrong. We also need to understand the cost of being wrong, and our ability to recover from it. One mistaken call on an equity market downturn or a surge in inflation could prove irrecoverable. Investors making regular high consequence, high complexity decisions are playing Russian roulette.

This is exactly what we frequently experience with prominent hedge funds managers. They are given the limelight and earn astronomical performance fees (no clawbacks) for getting one big decision right. The problems then arise when they have to repeat the trick.  

If we are to consistently engage in low probability investment activities then we will either fail quickly or slowly. Slowly – if we are circumspect then over time the poor odds of what we are doing will catch-up with us. Quickly – if we take enough high consequence bets then one of them will end in disaster.

The interminable noise of weeks such as these gives entirely the wrong impression of what investing is and should be about for most people. Getting macro and market calls right is hard once, doing it repeatedly is close to impossible. Fortunately most of us don’t even need to try.

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My first book has been published. The Intelligent Fund Investor explores the beliefs and behaviours that lead investors astray, and shows how we can make better decisions. You can get a copy here (UK) or here (US).