Successful Investing in the Face of Uncertainty
It’s easy to think that you know what the future holds — whether inflation will rise or fall, which investments will do well and which poorly, what the political shape of America will be in five years.
But the future invariably contradicts our expectations in some way. Often you can be right in your general expectations, but wrong about the specifics — so that the investments you bet on don’t work out.
There is no way you can eliminate uncertainty or obtain a private line to the future.
Over and over again we are proven wrong when we bet too much on our expectations, and yet each time we’re tempted to believe we’ve found a sure thing. But sure things don’t exist in the real world. Every economic event results from the motivations and actions of literally billions of people. To assume that you can predict what all those people will do is not only presumptuous, it is dangerous.
There is no way you can eliminate uncertainty or obtain a private line to the future. You have to let the future unfold as it will. Uncertainty is a fact of life.
However, you do have expectations you believe that some things are more likely to happen than others. It would be foolish to treat those expectations as certainties, but it would be equally foolish to ignore them — since disregarding them would leave you exposed to the dangers you see and unable to profit from what you believe will happen.
Uncertainty doesn’t mean that you know nothing at all, that your opinions have no merit, or that you are helpless to prepare for the future. It does mean that you should allow for surprises — never taking anything for granted and never treating an investment as a sure thing.
Basically, your job is twofold:
- You need to understand the general forces at work in the world. With this understanding, you are less likely to be surprised by what happens. And you’ll have a sense of the probable, which can help you ignore fashionable opinion when is is wise to do so. As long as you distinguish between expecting and predicting, your understanding will save you from many costly mistakes.
- You need to arrange your economic affairs in a way that reflects your expectations but at the same time, allows for the possibility you’re wrong. In other words, you should hedge against your main investments — so that the inevitable surprises won’t be catastrophic.
To make money on your investments, it isn’t necessary to know the future. It is necessary to base your opinions upon understanding — not upon hope or wishful thinking. And it is necessary to have an investment program that is realistic, that relies only on what you’re actually able to do — not on what might be profitable if we were all as clever as we wish we were.
Ed. Note: This essay was originally featured in the Daily Reckoning Weekend Edition – one of 2 bonus issues that readers receive as part of their FREE Daily Reckoning subscription. Not only that, but the Weekend Edition features a market wrap-up and several opportunities to discover actionable investment advice. Sign up for FREE, right here, and start receiving all the great rewards you deserve.