Founder and chief investment officer of the Discipline Funds and author of the popular blog Pragmatic Capitalism, Cullen Roche sits down with The Long View this week to share his thoughts on navigating today's market, the macroeconomy, and the new Discipline Fund ETF.
Here are a few excerpts on the role of macroeconomics and investor behavior from Roche's conversation with Morningstar's Christine Benz and Jeffery Ptak:
Macroeconomics and Financial Planning
Benz: You write a lot about macroeconomic issues. So, where do you think macro belongs, or perhaps more importantly, doesn't belong in the financial advice and planning process?
Roche: So, to me, so much of this is about behavior. I think a lot of people study macro, and they think they're going to become like the next George Soros or Ray Dalio, and they're going to use these ideas and beat the market and have some sort of high fee type of mutual or hedge fund type of allocation where they're able to generate tons of alpha and that sort of narrative. Whereas I take it from the kind of the opposite view that to me, macro is really about understanding the world for what it is so that as we navigate it, and we encounter all of the behavioral difficulties that are inevitable across the investing environments that we're trying to navigate that we behave better, in essence, because we feel more comfortable because we understand a lot of these big picture things that a lot of which are just incredibly, incredibly confusing.
Can We Prevent Bad Financial Behavior?
Ptak: You mentioned the behavioral aspects. You know, one of the things I think that occurs to Christine and I, with the benefit of hindsight, is that people do tend to dwell on macro issues at what 2020 hindsight proved to be the wrong times. I mean, based on your experience, managing your practice, and working with clients, do you agree and sort of what are the proactive steps that you take to try to counteract some of that so that they're focused on coming up with good plans with you and sticking to those?
Roche: Yeah, and so much of it is education based. I mean, to me, it's not so much about understanding the world so that we can take advantage of these things in a sort of alpha generating way where we're trying to be able to time the market or things like that. Really, to me, so much of this is about being able to understand the world for what it is so that we don't behave badly. And I think that one of the problems, especially in the Internet age is that, to me, I think a lot of the financial media has an inherent conflict of interest where they are promoting views and narratives that are inherently short term. And a lot of that is emotion based. A lot of it is hysteria that is based on either trying to drive eyeballs, or in a lot of cases, it's based on just bunk, a lot of misunderstandings about things and the causality of them and the potential outcomes. And so, to me, so much of macro is just about understanding the stuff for what it is so that as we try to navigate the day-to-day trials and tribulations of the financial markets, that we're not tripped up and prone to all of these behavioral biases that can result in really catastrophic mistakes for people at times.
"The Psychology of Money"
Benz: Do you think people have a greater propensity to fight the last war when it comes to macro issues compared to other types of issues that have a bearing on their financial success?
Roche: 100%. You know, the Morgan Housel's book Psychology of Money had a great take on all this, where people tend to focus on the environment that they're born into, that's the environment that shapes them, and it shapes their psychology of how they end up navigating the next 10, 20, 30 years of their financial life. And so, somebody who was born in, say, the Great Depression has a very different financial perspective than somebody that was born in the last 10 years, for instance. And so, I definitely think that the tendency to sort of dwell on the big catastrophic mistakes of the recent past will shape people. And it's useful--one of the things that's nice about macro is that if you study the history of macro and the markets in general, you can develop a greater understanding of the likelihood that unusual things happen. And even though you've sort of been born into a certain environment, the likelihood that the future is going to be completely different is extremely high on average.
Are Investors Fighting the Last War?
Benz: So, where do you think investors right now are kind of fighting the last war? What things are looming large in their psyche that, you know, were things that happened in the past and may not carry forward?
Roche: Gosh, I mean, we tend to see a lot of the same narratives in the financial markets. People constantly think, for instance, that--I mean, in today's environment, for instance, the last war that I feel like I'm fighting endlessly is narratives about things like quantitative easing and is the U.S. government bankrupt. And to me, these are narratives that tend to have maybe a shred of truth but are based on huge complex issues that I think people tend to overrate. And so, those are two of the big ones that I consistently running into and sort of writing about in a sort of I think mindlessly repetitive way trying to just add some clarity to the way these things actually work.
The Macroeconomy Is Usually Very Boring
Benz: We're coming off a decade where markets have kind of shaken off a lot of macro concerns and powered higher. Do you think that that is cyclical, and macro will matter again in time, or is it more structural?
Roche: You know, it's interesting. I mean, the macroeconomy is usually very, very boring on average. I think Jason Zweig loves to talk about this on Twitter about how if you wrote a really honest newsletter for finance, you would basically say, every day, you would say something to the extent of some stocks went up, some went down, not much happened, it was pretty boring on average. And that is literally probably 98% of all the macroeconomics that goes on across time. And so, it's weird thinking about the way that people think about macro, because macro tends to matter much more inside of these very acute period where typically you have a shock to the economy, and you have an event like the financial crisis, or say, like the pandemic, which these things to a large degree just sort of they--at least the negative extent to which they impacted the economy was very surprising and very rapid, very unpredictable. And so, macro always matters. I would say that it matters much more in certain environments than it does in other because, in my view, the potential for behavioral biases become so much more exacerbated inside of specific shocking events than most of the time when things are just very boring.