Unpredictability Ignorance

It’s not so easy to be active in the stock market.

Because when people I meet learn that I make my money predominantly from the abundant stock market, they—more often than not—flood me with questions on my prediction of the future trends and also, to share one ‘hot tip’.

I have to say that the latter—the sharing of the one ‘hot tip’—is easier to comply:

I simply don’t give out tips!

Not because I am egoistic, or that I am reluctant to share my knowledge, in truth, it’s because of these practical reasons:

1) I neither know their risk tolerance, nor their investment horizon, nor their emotional state, nor their fundamental financial situation, nor…  you get the point, don’t you?  One size definitely does not fit all, no matter what H&M tries to tell us with their “One Size fits All Socks” (they are too small for me anyway).

2) Even if the ‘tip’ was right for them, can I guarantee that I would be able to inform them when I believe would be a good time to sell that stock?  No, I can’t.  Thus, it would be unfair to share only one end of the trade, the “buy now” without ensuring an update on the “sell now” as well.  Moreover, crucial corner stones wouldn’t be in place; like how much to buy and where to put a stop-loss.  I might mention these points, though I doubt that they would be ‘heard’ and ‘adhered’ to.

3) I don’t want the future friendship to be hinged on the rightness or wrongness of my previous ‘hot tip’.

But to return to the former—my prediction about future market trends—it would take a bit longer to explain as it’s more elaborate, so bear with me for a while:

Every aspect of the world is fundamentally unpredictable.  Computer scientists have long since proven this.  If you could predict your actions, you could deliberately violate your predictions, which means that the predictions were wrong after all.

Whoa, was that too fast?

To help clarify the above, here’s an example from the physical world:

The only way to learn about tomorrow’s weather in detail would be to wait—twenty-four hours—and see, even if nothing is random at all.  The universe is computing tomorrow’s weather as rapidly and as efficiently as possible; any smaller model would be inaccurate, and the smallest error would be amplified into large effects.

And here’s another, from a personal level:

Even if the world would be as deterministic as a computer program, you still would not be able to predict what you’re going to do.  This is because your prediction method would involve a mental simulation of you that produces its results slower than you do.  You can’t think faster than you can think, nor can you stand on your own shoulders.

In essence, it’s futile to chase the pipe dream of a magical tiny theory that would allow us to make quick and detailed calculations about the future.

We can’t predict, and we can’t control; nonetheless, to be able to accept this could be a source of liberation and inner peace, since we’re all part of the unfolding world, surfing the chaotic waves, and encountering the occasional Black Swan along the way.

This is a difficult concept to grasp; therefore, I am constantly working on my emotional rewiring; learning to take responsibility, and to live with uncertainty.

So, my answer is “I don’t know”.

Neither do you, nor does anyone else.

To that end, we need to stop clinging to the belief that others might be able to predict the future; to stop paying fortune-tellers for illusory certainty; to stop listening to bankers (fortune-tellers in smart suits) forecast next year’s dollar rate, in spite of the fact that their track record is hardly better than chance.

Still, we read those erroneous future predictions and draw conclusions from them, which can result in nasty outcomes for our money.

Perhaps my attempt at compressing and conveying the fundamental law of investing (“the future is uncertain”) has made investing sound a bit arcane, or worse; made you indecisive about whether you can/should invest with confidence,

Not only do I apologise for this, I also would like to offer a “confident high probability solution”:

Start a regular savings plan into three or four broad based Exchange Traded Funds (ETFs), because this would remove the big issues of timing as well as the emotions that hamper so many investors’ long-term returns.

This approach simply involves buying a fixed amount of investments monthly, rain or shine, no matter how good or bad the markets might look.  Additionally, it would also remove the stress from investing as there’s no need to decide whether those ETFs are costly (or not) or whether the market conditions are conducive for investing.

Nevertheless, I have to admit that this approach is not totally risk-free either, but it has a solid risk/reward ratio as well as high probability when applied over the long-term, judging from their historical track record.

Lastly, know that there is no stability without volatility and that risks and responsibilities are chances to be taken, not avoided!

 

“An unbiased appreciation of uncertainty is a cornerstone of rationality.” — Daniel Kahneman

“I believe if we teach young people, children, the mathematics of uncertainty, statistical thinking, instead of only the mathematics of certainty—trigonometry, geometry, all beautiful things that most of us never need—then we can have a new society which is more able to deal with risk and uncertainty.” — Gerd Gigerenzer

“The future is as uncertain as the past is obvious, but it’s so easy to convince yourself of the opposite.” — Morgan Housel

“The more eagerly we commit to scrutinizing and testing our theories, the more readily we accept that our knowledge of the world is uncertain, the more willingly we acknowledge that perfect prediction is impossible, the less we will live in fear of our failures, and the more liberty we will have to let our minds flow freely.  By knowing more about what we don’t know, we may get a few more predictions right.” — Nate Silver