One Asset Price, 20 Years from Now

George Mason University economist Tyler Cowen has an intriguingblog post asking a deceptively simple question:

You are an investor with $10 million planning to cash out in 20 years. A genie appears and offers to send you the price of one but only one asset 20 years from now to inform your investment decisions (a stock, currency pair, commodity, equity index, etc.). What do you want to know?

I love this question, but in a very counterintuitive, non-obvious way. It is the logical follow up to yesterday’s post on forecasting.

Almost 100 people responded to Cowen with answers like the Standard & Poor’s 500 Index, commodities, the euro-dollar exchange rate, Google, Apple, milk, local real estate prices, the MSCI World Total Return Index, copper and more.

 All of the responses are fine and interesting — and they’re all wrong.

It isn’t just that the answers are incorrect. This is reminiscent of the job interviewer who asks an applicant to open a permanently sealed window: it’s a trick question. The purpose really isn’t to find a correct answer, but rather to reveal your thought processes and problem-solving skills.

Let’s explain why the responses are wrong: Just knowing the price of an asset 20 years from now doesn’t give you enough information to formulate a proper, reasonable investment thesis. Asset prices are not only cyclical and volatile, most important of all, they are relative. Price alone is just one piece of information within a vast universe of data points, many of which may be even more important than the price of that single asset and a specific point in the future.


Continues here: A Simple Question for Investors


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