Part 1: Illusions of Certainty

April 18, 2017

As the Trump administration has run into choppy waters during its first hundred days, there’s a growing question regarding what reforms might ultimately pass and this has given rise to an increase in investor uncertainty. In truth, this is an oxymoron in that it implies that there is such a thing as investor certainty; and we can assure you there’s not!

At Beaird Harris, throughout our history, we have relied on an investment philosophy that doesn’t revolve around predicting the future.  This has always made inherently good sense in that by definition, the future is unknowable.  One of our favorite quotes is by a truly brilliant Nobel Prize Winning Physicist by the name of Niels Bohr, who said, “Prediction is very difficult, especially if it’s about the future.”  Who are we to argue with Niels Bohr!

Even so, most investors long for and embrace market forecasts by so-called “experts” who peer into the future and boldly predict where the market is heading.  With mountains of evidence to suggest that this is a fool’s game, why do we spend so much time attempting to know the unknowable and why are we so attracted to forecasts?  These are great questions.

In reality, every investment we make involves an assumption about the future; you can’t get away from it.  With that comes uncertainty and risks and that makes investors uncomfortable.  It’s human nature to want to hear positive reinforcement so all of us are attracted to market forecasts; it’s unavoidable.

Taken a step further, it’s a certainty that the future will decide our investment success or failure.  Uncertainty about the multitude of possible outcomes creates the investment risk that we all struggle to contain and which gives rise to the need for a behavioral coach, which is one of our primary roles at Beaird Harris.  It’s so easy to overreact to market events and make the wrong decision at the wrong time.  The best athletes in the world need coaches and so do investors.  

All of us hate losing money, it’s universal.  Furthermore, research conclusively shows that losses are much more painful than gains are pleasurable, so we’re hard-wired to think cautiously.  With that background, even the most passive investor among us is still comforted when a CNBC market prognosticator makes optimistic predictions about future stock prices.  

In effect, predictions create an illusion of certainty.  The desire to wish away the risk of an uncertain and unknowable future is what makes us so susceptible to forecasts.  Deep inside, we want to believe the positive forecasts are true; it’s a part of human nature that we’re stuck with.  

Even though we’re investment professionals, we too have an inherent desire to know the future.  Fortunately, we know we can’t and we don’t rely on an investment philosophy that requires it!
 

Read Part 2: The Uncertainty Solution


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