What “Can” Happen vs What “Will” happen
There are lots of market commentators who promote absolute certainty. Many of them have reasons to pretend that they are absolutely certain about a subject, because their lively hood depends on a specific outcome.
Never ask your barber if you need a haircut
A far more rational way to view the world is to be less certain, but position your views toward risk weighted outcomes. When you realise you don’t know what is going to happen, you can start to attempt to correctly price risk.
This is where we find ourselves today in the middle of the corona virus.
Be very careful of those that promote absolute certainty and listen more to those that allocate capital with skin in the game in a probabilistic manner.
The beautiful position of being asset agnostic means that we can allocate to where we believe we know much of the range of what “can” happen and we are getting paid to take the risk.
Tail risk outcomes are becoming more likely in this environment. We have a strong view on Australian property and the Australian banking system. Our view is that property is multiples of its fair value in Australia and if it reverts closer to its fair value, the banking system requires large recapitalisations. We have had this view for a number of years, although we have never known when the risk might materialise. We are now seeing that risk increase. We know what “can” happen to the Australian property market, but we certainly don’t know what “will” happen. We are very confident you aren’t being paid a premium to take the risk to find out.
By using what “can” happen to avoid risk, we believe we are protecting capital better than many.
Conversely, when we see opportunities that have significant upside versus potential downside, we take a very assertive position. We certainly don’t know exactly what will happen, however we generally know what “can” happen which means that we will likely be far more right than we are wrong over time.