Mark Hanna: Nobody knows if a stock is going to go up, down, sideways or in circles. You know what a fugasi is?
Jordan Belfort: Fugazy, it’s a fake.
Mark Hanna: Fugazy, fugasi, it’s a wazi it’s a woozy, it’s fairy dust.
The Wolf of Wall Street.
This is probably not going to be the most frequently quoted part of the film Wolf of Wall Street, but it does illustrate a very important point. Jordan had just joined a firm of stockbrokers and was learning the ropes. He was very fortunate to be given this sound piece of advice, which did help him to navigate his way through the world of stock-broking. Unfortunately for him, he also went on to make some very unsound life decisions, but that is another story.
The character Mark Hanna had already worked out (the movie is set initially in the mid 1980s) that stock prices are largely unforecastable in the short term. The timing of the 1987 stockmarket crash so soon after the start of Jordan’s career as a stockbroker illustrated perfectly the point that Mark Hanna was making.
So if stock prices are subject to such randomness, is there ever anything we can say about the future of prices? Fortunately the answer to this is “yes”, but probably less so than many investment commentators and forecasters like to admit. If there has recently been a crash, or significant period of poor performance in stock prices, there is more chance that returns will be higher in the future, since prices may have reached levels that are too low, relative to fundamentals. And this process works in reverse too – if prices have risen a lot, such as during the late 1990s, there is a greater chance of poor returns in the period ahead. These swings in pricing are largely driven by behavioural factors as investors swing from greed to fear about future returns.
Howard Marks, Chairman of Oaktree Capital has recently written about the role of luck in his latest memo. He writes about the randomness at work in the world and the unpredictability of the future, and that it is “hard to know what will happen and impossible to know when it will happen”. He concludes that the best opportunities arise in inefficient markets, where it is possible for prices to depart from where they ought to be.
Howard Marks claims that “Investment success isn’t just a question of whether the investor puts together the “right” portfolio, but also whether it encounters a beneficial environment”. Being successful requires a significant degree of luck. Jordan Belfort’s life could be described as one where he experiences both extremes of good and back luck. The same is likely to be true when investing!