This anecdote took place in England in the early 1940s:

During a demonstration of artillery procedures, observers noticed something odd:
Just before firing, two members of the gun crew stopped all activity, stepped away from the cannon, and stood at attention.

When asked why, the crew responded, “That’s how we were trained.”

Curious, the officer consulted an old artillery colonel. Upon seeing the photos, the colonel laughed and said:

“Ahhh, they are holding the horses.”

Decades earlier, artillery pieces were pulled by horses. The blast from the cannon would spook them, so two crew members were assigned to hold the horses steady during firing. Even though horses were no longer used, the procedure had never been updated—those crew members were still performing a now-obsolete task.

This is a classic example of how outdated procedures can persist long after their original purpose has vanished. Efficiency experts call this institutional inertia and it occurs across many facets of our lives, wealth management notwithstanding! It’s a reminder to regularly question why things are done a certain way and whether they still serve a purpose.

Economic Analysis & Forecasting

Economists offer insightful analysis of how economies are structured and how they evolve. However, their crystal ball regarding economic events and stock market reactions are as cloudy as any used to predict future events. For decades, investors tried to embed economic predictions in their investment efforts with disappointing results. In recent decades, more stable techniques focused on historical data became the better approach to achieving investment success. Economic predictions aren’t a driving factor in most portfolio strategies. However, economic news and forecasts still dominate the conversation.

I sit on the Investment Committee for a Foundation that has a large endowment, which was managed by a large investment management firm. At performance review meetings, the management firm’s representative devotes considerable time to telling us what happened in the economy, what economic risks seemed important in their view and what their outlook was. It was essentially a distilled version of last week’s Wall Street Journal headlines coupled with a muddled consensus forecast. During the 2022 surge in interest rates and stock market sell off, the firm’s economic analysis turned more downbeat. I asked the representative, “How did you change the investment portfolio to take into account your economic model?” The answer was a long-winded version of “we are leaning more conservative due to the risks”. I asked, “show me the trades that were done to lean more conservative”. Crickets.

The economic forecast was “the horses”…no longer central to the portfolio management effort.

“Well, we didn’t do any trades, but we intend to let cash balances increase from cash flows”. An awkward silence ensued before we moved on to other business. I was relieved that they didn’t make any decisive investment changes based on economic forecasting, because the history of economic forecasting is fraught with errors.

Post script:

At the next meeting, the representative dutifully delivered their current economic analysis and forecast focused on the current events. Here, hold the horses. Of course, I should mention that the committee members welcomed this analysis. Whatever message I thought had been delivered at the prior meeting was quickly forgotten and we returned to the status quo, irrelevant as it is.

Remember JP Morgan CEO Jamie Dimon’s forecast of “an economic hurricane” in 2022?[1] He’d like you to forget. Nothing happened. JP Morgan’s Investment arm forecasted a recession and negative returns for equities in 2023. Did they change their investment portfolios to cash and go to the bunkers? Nope…and thank goodness for their clients’ sake.

I shouldn’t single out JP Morgan. They have plenty of company, including most of the legacy big banks and investment firms. Many of these turn out regular economic narratives that give their clients some entertainment, but at the end of the day, matter little to their actual investment portfolios. Most credible investors build portfolios to meet specific goals and investment objectives using stable asset allocation strategies based on long-term data on risk, return & correlation. However, many still want to give you their economic views, despite its minimal impact on the effort. It’s the way they’ve always done it…clients expect it, and they deliver!

Tarriff Interpretations

Which brings me to economic analysis du jour – tariff impacts. The recent delivery of sweeping new tariffs prompted many banks and investment firms to publish their take on the changes. Will it change their investment portfolios? Probably not in any appreciable way.

HPA’s View on the Investment Implications of Tariffs

Here’s what we know about tariffs:

• They’ve existed for centuries, and they change frequently
• Last week’s changes in rates and applications are known
• There is significant potential for additional (unknowable) changes in the months to come
• Whatever the ultimate economic impact of these tariffs, corporations will adapt their own strategies to adjust to tariff policy as needed. Adapt and survive…this is the strength of enterprise.

We acknowledge that there will be some companies that see negative impact from the changes. However, basing your investment strategy on any economic factor, no less one as variable and unpredictable as tariff policy, has a low probability for sustainable success. As you know, we employ proven high probability approaches to the investment effort, without the burden of legacy systems and institutional inertia. Nobody needs to hold the horses at HPA.