I read Howard Marks’ memo entitled “Uncertainty” (CLICK HERE) and was struck by several of his messages.
The broad thrust is that there is desperate lack of intellectual humility and that this is dangerous in both our personal and business lives.
Intellectual humility means saying “I’m not sure”, “The other person could be right” and even (shock horror) “I might be wrong”. And how often do we hear such statements? Too rarely.
We love the idea of certainty and security. We want to know for sure what has happened, why and what will happen in the future.
We expect our politicians, investment professionals, etc., to be sure of and deliver future certainty, which they attempt by making forecasts. As that is all they have to offer, we put great store in them, but we should simply ignore them.
But the future is unknowable, which by extension means that forecasts are worthless. It is remarkable that we pay forecasts any attention, let alone put our faith in them.
John Kenneth Galbraith said: “There are two kinds of forecasters: those who don’t know, and those who don’t know they don’t know.”
Ian E. Wilson (former Chairman of GE) said: “No amount of sophistication is going to allay the fact that all of your knowledge is about the past and all your decisions are about the future.”
It’s pot luck whether a forecast turns out to be true or false. No-one can predict things that are heavily influenced by randomness and are otherwise inconsistent. Just think of the number of factors involved in predicting where investment values are heading – there are simply too many possible outcomes to be sure of any forecast’s accuracy.
I do my best (could do better) to express as little confidence as possible about returns over the next 1-3 years. For 3-7 years I am 50% confident (a coin flip) that values will be higher than they are today. For 10 years+ I have next to no doubt at all that they will be.
I am comfortable with my uncertainty, I am happy to say, “I don’t know”.
My job is to help you feel the same level of comfort about uncertainty. If we succeed, then I know we have given ourselves the best chance for everything to work out fine. If we fail, we are in trouble.
We include a good deal of uncertainty in your financial plan, by overestimating factors likely to have a negative impact and underestimating those with a positive impact.
It is not for nothing we use an investment return of just 0.5% pa above inflation, or add contingency costs, or ignore anticipated inheritances in our financial plans.
And, in the short term, we do our best to neutralise uncertainty by having enough in cash and knowable income to see you through the next three years.
This is the best we can do.
I could of course profess high levels of certainty and create financial plans that look amazing and carefree.
But our “certainty” about the future will be proved wrong more often than it is right, whereas our uncertainty will be proved right time and again.
If we profess confidence in, and act on, our “certainty”, your financial plan will fail. You simply cannot bake certainty into a financial plan that has so many moving parts and random factors.
By embracing uncertainty, we achieve a better outcome for you. There’s real peace of mind to be found in uncertainty.
It is good for me to keep working on my intellectual humility and I encourage you to do the same. And what’s good for me is good for you.
Howard Marks says: “The concept of epistemic humility is . . . an intellectual virtue. It is grounded in the realization that our knowledge is always provisional and incomplete – and that it might require revision in light of new evidence.”
The world is uncertain, life is uncertain. The future in unknowable, it always has been and always will be. Tomorrow is as uncertain and unknowable as every other tomorrow in history. Here and now is no different to any other time in the history of this planet.
Yet we crave certainty; knowing it never can be and never has been provided. Instead we should embrace uncertainty. Certainty makes us do things we later regret. Uncertainty means we pause to reflect before acting.
Voltaire said: “Doubt is not a pleasant condition, but certainty is absurd.”
Uncertainty is our friend, certainty our enemy.
At least, that is how it looks to me.
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