Why Blade Runner means we won’t be predicting 2021
Have you seen Ridley Scott’s Blade Runner? The original “attack ships burning off the shoulder of Orion, tears in rain” one, from 1982? If you haven’t1, don’t worry, I won’t be giving away any spoilers; I just want to point out that it’s a perfect example of how hard predicting the future can be. It’s the small things that catch you out.
In Ridley Scott’s imagined Los Angeles of 2019, there are flying cars and lifelike robots. But even though we don’t have those yet (come on Elon!), that’s not the thing the film got most wrong. The most jarring thing, to our modern senses, is that the characters all still use physical pay-phones to talk to each other. Huh?!
Sci-fi film-makers have two big advantages over investors when thinking about the future – they can think wildly outside the box, and no-one minds if they get it wrong (as long as the dialogue is snappy and there are enough explosions).
In 1983, the year after Blade Runner came out, Motorola made the first commercially available mobile phone. The technology had actually been around for about a decade before that. It wasn’t impossible to predict. But even in his most definitive futurist film, a visionary creative like Ridley Scott didn’t nail it2.
Because predicting the future is hard.
Preparing, not predicting
For investors, it’s just as difficult – and the consequences of getting it wrong are far greater. A sci-fi novelist may or may not be right, but if you are wrong, that’s potentially disastrous. You could even be right about flying cars, and yet invest in the wrong company. Or be right about the cars, right about the company, but fail to stick it out for enough time3.
Perhaps the best way to put it is this: you can be wrong about a single prediction in hundreds of millions of ways. And you probably don’t have hundreds of millions of pounds to be wrong with. So, what’s the solution?
Unsurprisingly, given who we are and how we manage money, we think that there are a few things that investors should sensibly spend time on – preparing for the future, rather than predicting it.
Prepare a plan
Like any journey, first you need to have a plan – you need to know what your destination is, and which direction it is in. Have it plugged into the GPS of your (non-flying) car. In investing terms, that means making sure that your portfolio is set up sensibly from the beginning, according to your aims.
For us, that means nailing down our structural foundations, through our Strategic Asset Allocation. This is the framework underpinning all of our portfolios, making sure that each risk profile is ready for the decades-long journey ahead.
This framework doesn’t worry about predictions. Instead it relies on the fact that over time, the financial markets reflect the long-term trends in the world, because as companies and business models become more important, they become larger. And you don’t have to worry about predicting which companies these will be if you invest in a little bit of everything. A well-diversified asset allocation is looking to have a finger in every pie, rather than choosing the best pie going.
Be prepared to adapt that plan
Sometimes, if circumstances change, plans need to be reviewed and journeys adapted. There are two types of adaptations we think about.
The first, is our regular annual update to our Strategic Asset Allocation. Think of it like a software update to your GPS system – which takes into account any structural information about the journey ahead. Most of the time not much happens, but occasionally a new road opens which might make things easier. Worth keeping track of. That’s what we do every year with our framework – check it’s as up to date as it should be.
The second kind of adaptations are tactical – like ignoring the GPS for a little while. Sometimes, on a journey, we deviate from the quickest route. It might be to take a more scenic road, or to have a rustic pub lunch, or to dodge traffic. That’s how we think about our tactical changes to portfolios.
We use our tactical flexibility to adjust our long-term allocation to short-term events – we’re not changing the destination, but just taking a slightly different route on part of the journey.
This allows us to take some profits when we see an opportunity, or look to deploy some dry powder into undervalued opportunities. Tactical flexibility also lets us look for attractive entry points to some of the longer-term themes in the world. Back to the pie analogy – it’s ever so slightly preferring one or two types of pie to some of the others, but still making sure that every flavour is represented.
Be prepared to listen to experts
Experts and specialists have their place. So in some areas, where it’s appropriate, we partner with active managers who know their niche better than we do. Again though, these active managers aren’t chosen for their psychic ability as forecasters. They tend to think like us, looking for opportunities at the side of the road, while others are speeding past, eyes focussed on the GPS.
As long as we give them enough time they’ll come through and actually, they tend to mean that our portfolios end up being even more diversified. These active managers are like trained chefs, helping to point out which pies might be most suited to sampling.
Back to Blade Runner
Being prepared means that we don’t have to worry about predictions when it comes to investing. However, that doesn’t mean it isn’t interesting to do so as a way to kill time. So if you’d like to discuss predictions about the future, why not go and watch Blade Runner 2049, and we can have a chat. Then I’ll meet you in 28 years to see how we did (if it’s raining, I may send my android).
1 Why not?!
2 Actually, Blade Runner was based on the Philip K. Dick book, Do Androids Dream of Electric Sheep? Dick was even more of a futuristic thinker than Scott – but he didn’t see mobile phones coming either!
3 Maybe the ultimate example of this is Ronald Wayne, who co-founded Apple in 1976, then sold his 10% stake in the business 12 days later for $800. 10% of Apple is worth (roughly) $100 billion today.