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The Only Certainty is Uncertainty

Updated: Dec 1, 2021

‘History is just one damn thing after another.’

Arnold Toynbee

Late last week, the emergence of a new COVID-19 variant in South Africa sent shockwaves worldwide, upending what had been a reasonably quiet week for the stock market. On Friday, a steep sell-off left the S&P 500 and the Nasdaq down 2.2% and 3.5%, respectively.

This 147th twist in the pandemic tale got me thinking about how much we think we know when really, we know nothing at all.

Nobody would have predicted that 2020 would have played out the way it did at the start of the year. Very few would have predicted that a 2021, promising vaccines and a return to normality would have represented so little change, but here we are.

Everyone loves to pretend like they fully understand what this all means and what will happen next. I get it; who doesn’t love the warm cozy allure of certainty. We all want to exist in a world where we know what lies around the corner.

Unfortunately, the reality is, nobody knows what’s next, and the sooner you can discard any naive sense of conviction, the easier it will be in both life and investing. While this statement may seem morbid on the surface, loosening our grip on our need for certainty can be liberating.

The Game is Always Changing

History is a perpetual stream of mistaken opinions and unpredictable outcomes, but the predictions won’t stop. People will cast their views with deluded certainty about what to expect next by extrapolating the current conditions out into the future, but the current conditions aren’t a constant, and the game is always changing.

Remember, while it is important to have expectations and predictions, predictions are not fact, and you will be wrong. Not always, but you will be wrong, so try not to be overly tethered to your current version of the truth.

The Risks you Can’t See

In markets, there will always be uncertainty. As one seemingly detrimental event subsides, another one comes to the fore and commands our attention. Unfortunately, in a world of 7 billion people, A blissful utopian society where everyone just gets along is simply a pipe dream. History is just one damn thing after another.

The below chart illustrates the biggest tail risks in financial markets since 2011 according to global fund managers,

There are two points to note here.

1. Were any of these a reason to sell? Broadly speaking, none of these hot button issues resulted in a meaningful impact on markets. The NASDAQ returned 1500% over the same period.

The impending doom will manifest itself in a variety of different ways, and calls for the top will be ever-present, but optimism has prevailed over time.

These risks can often seem like the most important thing in the world in the moment but fade into insignificance over time. Time and time again.

2. Story follows price: The Coronavirus, of course, had a meaningful impact on markets, but this only became a tail risk in the report after it had already happened. In early 2020, the US presidential election was being touted as the major headwind for investors. In hindsight, this obviously seems like a redundant issue seeing as the entire global economy shut down just 2 months later but again, you can only generate outlooks and opinions based on your interpretation of available information and as the information changes, so too will your opinion.

We spent the last decade debating minor moves in CPI, PCE and the ISM index and obsessing over whether the FED would set interest rates at 0.25% or 0.5%. Then the entire global economy shut down and 36 million people lost their jobs in the US alone because of a virus that nobody predicted. It's the risks you can't see that are most impactful.

It can help to look back on the historical list of major risks faced by financial markets.

What proportion of the hysteria was warranted and how impactful were these events? Realising how few of these events meaningfully impacted your portfolio over time may help elevate the stress of the day-to-day market movements.

Lean into the uncertainty

Accepting that nothing is certain can often be cast as an impotent statement in a world obsessed with knowing all the answers.

In an industry where uncertainty is the ultimate enemy, telling investors to submit to it is often met with disdain, but accepting the inevitability of uncertainty is so important if you want to avoid going stir crazy as you try and hold for the long term.

Of course, discarding uncertainty is easier said than done. Worrying about factors beyond our control is an inherent part of the human condition. However, simply being aware that the game is not predictable and nobody truly knows the final outcome may help you reduce your craving for certainty.

My advice

Stop reaching for perfection in a world of constant uncertainty. Stop obsessing about making the right decision 100% of the time. Even the best investors in history have had their fair share of howlers. Ultimately you just need to be right more often than you are wrong.

The solution

Create an investment portfolio centred around what you believe to be the most probable outcome based on available information and incorporate enough diversification to function as a buffer.

In a world where anything is possible, all you can do is focus on what is most probable, allow for a margin of error to support you when your assumed outcomes don’t play out and simply let go of the rest.

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