(Au)our Monthly Newsletter
This past year experienced a change in the investment story. The year started with the belief that inflation was transitory. Now, the story is one of higher for longer inflation. With historic changes in interest rates and global central banks determined to fight it at almost all costs, the story increasingly became about the upcoming recession. Market commentators have been impatient with their desire to call the recession but, it would be hard to find evidence that we have entered one yet.
Though we haven’t entered a recession yet, there can be no doubt that the anticipation is having an impact. The changing investor sentiment is making its way through the economy. No longer focused on a growth-at-all-costs operating model, company management teams are now preparing for an economic slowdown. It is still being determined what that means for the jobs market, consumer consumption, and investment outlook. Will it be a hard landing, a soft landing, or a complete avoidance of economic pain? Almost everyone has an opinion but there is no way to be certain. We will lay out our thoughts as we enter the new year.
Leaving a forward look for another time, now is a good time for reflection. We have long described our investment process as rooted in gauging where investors are on the Greed Spectrum (from excessive greed to excessive fear) and the Confidence Spectrum (from extreme complacency to extreme uncertainty). 2022 started with a high level of greed and complacency and appears to be ending with higher levels of fear and rising levels of uncertainty. We don’t think we have seen the peak in fear or uncertainty.
If we are right that uncertainty will be with us for a bit longer, we think Peter’s words below are apropos.
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The holidays can be especially challenging time of the year for many. Whether we realize it or not, they prompt moments of reflection and comparison where we conclude we’re not enough.
With these thoughts in mind, I’d like to offer some thoughts on something called underconfidence – for if I have a concern as we close out 2022, it is just how widespread I see this phenomenon today, especially among highly talented, deeply feeling people.
We readily accept the idea of overconfidence – the idea that we can grossly underestimate risk, as we imagine too much certainty and too much control ahead.
We need to be more open to the idea that we can be underconfident – that we can just as easily grossly overestimate risk – that we can imagine things are far more uncertain and we are far more powerless than we really are.
We are routinely underconfident. If you trembled on an airplane amid heavy turbulence or feared for your life on a rollercoaster, you’ve woefully overestimated the peril you really faced.
But your feelings were real. So, too, were the stories you told yourself and what you did in response. All were undeniable.
Ironically, that is what makes them so helpful as a framework to help us better identify when we are underconfident. Our feeling, stories and actions exist in equilibrium. If we know one, we know them all.
Whether we realize it or not the future is always uncertain. And it always was and always will be. Like it or not, we never know what is ahead.
What changes is our imagination of the future. Because the future is unknown, we must come up with something to fill the void. We abhor uncertainty.
To fill the void, we come up with stories – often together with others. Today, we are awash in shared imagined stories of the future.
What we overlook is that those stories all precisely mirror how we feel. They are reflexive not predictive. They are a much better assessment of how we feel than they are an accurate read of what is to come.
Anytime we tell ourselves extremely positive stories that reflect extreme certainty and control ahead, we need to recognize that we are being overconfident. Moreover, we are likely to take actions that reflect those feelings. We will take too much risk than we should.
And it’s the same at the other end of the Confidence Spectrum. When we are underconfident, we imagine too little certainty and too much powerlessness than there is likely to be ahead.
And the consequences are many. We’re too pessimistic. We overthink. We turn more inward and are less social. We lose our drive to move forward. Moreover, in comparison to others, we feel less than and sadly in every way.
Our underconfidence confines us. We feel trapped in a cage of relentless uncertainty and powerlessness. Like passengers on a highly turbulent flight, we want off the plane.
Handling underconfidence requires us to be open to the reality that the condition exists and is routinely in our lives.
It also requires us to look at our feelings, stories and actions as objective facts – to assess them honestly not for their accuracy but for what they say about our level of confidence. Remember they are a three-way mirror.
It also means we need to let go of the stories that not having confidence is weakness – and all the self-blaming stories we tell ourselves.
Being healthily underconfident starts with being able to say, I don’t feel certainty and/or control in my life right now.
More importantly, it starts with not extrapolating those feelings into the future. That is where things get dangerous. When we catastrophize, we tell ourselves stories that our feelings of uncertainty and powerlessness will be intense and unending.
Again, while that may all feel true, it is pure confidence-driven imagination.
For what it’s worth, the early days of the pandemic were accompanied by collective catastrophize – feelings of uncertainty and powerlessness were saturating and being extrapolated in every dimension possible – and so were the stories and actions that reflected those feelings.
While we didn’t know how we would in the moment, we made it through. Little of the horror we vividly imagined happened.
We need to keep that in mind. While I am not saying it’s easy these days – especially with every other ad and news story reminding us that we “live in uncertain times” -recognizing the reality of underconfidence can help us to be more resilient.
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The Auour Investments Team
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