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Trader John Bowers, right, works on the floor of the New York Stock Exchange. When it comes to investing, two recessions per decade is just about a given.

I expect there to be one or two recessions in the next decade. I have no idea when either will arrive.

Those aren't contradictory statements. One is an expectation, the other is the rejection of a forecast. It's an important difference.

It's one thing to look at history and see that recessions and bear markets have occurred with some frequency, and form a baseline of what to expect in the future. It is quite another to predict the precise timing of either event. And it's another thing entirely to devise a strategy that reacts to those predictions.

Analysis isn't black-and-white, where some people believe we can predict markets and everyone else surrenders with their hands up. There's an important gray area, which is expecting certain events to occur without having an opinion on when, where, why or how.

There have been 12 recessions since the end of World War II, or an average of about two per decade. You can use this as a very rough rule of thumb for the future, based on the idea that we'll screw up and plow ahead about as regularly as past generations.

Now I have an expectation: If I plan on investing for the next 30 years, I should count on things getting ugly at least six times. Maybe it'll be a little more, maybe less. But I have an expectation, a rough idea of how the game works.

But it's not a forecast. A forecast is, "We will enter a recession in the first half of 2018." That's precision, with a disregard for both the history of people making such forecasts and the events that cause recessions — which, a lot of the time, can't be foreseen.


The important difference between an expectation and a forecast is the impact it has on behavior. If I expect recessions and bear markets, I won't be surprised when they come. I know they're a normal part of the game. But since I'm not sure when they will come, I won't attempt to do much about it. Attempting to do something about it — trading, timing, buying and selling — is the root of most investors' miseries and mistakes in the first place.

You don't get that humility safety net with a forecast. A forecast offers the idea that you know when something will happen, which is permission to act on it. There's little reason for a forecast other than acting on it, in fact. This creates a two-for-one problem: the false hope of knowing when a bear market will come and the high probability of regret from trading around it.


Capital markets are just a giant matchmaker.

Businesses need capital — some of it for the long term with the potential of a big payoff, some of it for the short run to cover bills. Savers need a place to invest their money — some of it for the long run with the potential of a big win, some of it for the short run with a lower but more certain payoff.

Efficiently matching the two together is the most important part of capitalism.

It's an amazing system when it works. Businesses can take long-term risks and meet their short-term needs, knowing they can serve the expectations of investors who want big risks (shareholders) and those who need a clearer future (bondholders).

But sometimes the dating service breaks, and an incompatible couple with different goals is hitched, doomed from the start with a predictably sad outcome.

The New York Times had a great story on NRG Energy, whose former CEO David Crane tried to take the coal-and-gas giant into the 21st century by pushing into renewables, where all the industry's future growth is. That shift meant taking focus away from areas of the business that generate predictable profits. Which was too much for shareholders to swallow, and Crane was fired.

The crazy part is that no one seems to disagree with Crane's vision. The Times wrote:

"In a letter to NRG employees shortly after his ouster, he said there was 'no growth in our sector outside of clean energy; only slow but irreversible contraction following the path of fixed-line telephony.' Soon after that, he wrote a blog post titled 'If I Was Right, Why Was I Fired?'

"'The sad moral of this story is that it's very hard to be a CEO for tomorrow, when the markets only care about being a CEO for today,' said Mr. Cramer of Business for Social Responsibility. 'I don't think anyone really questions his vision, but he wasn't given any opportunity to put it into action.'"

Shareholders own the company and get the final say. They had the right to fire Crane.

But investors increasingly want the benefit of being a shareholder with the short-term predictability of being a bondholder.

And that's where the system breaks.

The economy relies on a group of investors having the flexibility and time horizon to accept change, volatility and unpredictability. That's the oil of innovation. And the job has to fall on shareholders, who are the furthest down on the capital-structure hierarchy and the only providers of capital who can't sue over variable outcomes. There's nothing wrong with wanting predictable short-term returns. I want that for part of my money, too. But there's a place for people who want it: bonds and cash. The system breaks when you demand it from stocks, because the ability to take long-term risks and adapt to changing circumstances grinds to a halt.

I suspect this is why so much capital has shifted from public markets to private equity. While not perfect, it's a bit more patient and forgiving than public shareholders.

Soon after he was fired, Crane wrote:

"From a societal perspective, this lack of investor appetite for internal transformation is a dangerous inhibitor to corporate change — change which, in NRG's case, was both essential to its long-term viability and highly desirable from a societal perspective."

Crane now works at a private equity firm. Good for him.