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Uncertainty - is in addition to Risk
Risk and Reward are inseparable. They are measurable and we can manage the risk we take for any given level of investment return.
Unfortunately, history has demonstrated that most people (including professionals) cannot reliably predetermine their actual tolerance for risk. Only after they have exceeded that critical point do they truly learn their limitations, and often with devastating results.
Uncertainty is another issue altogether. Why, because we can't measure uncertainty. To account for this insecurity we must craft a sound defensive strategy that can withstand the unforeseen events when they inevitably occur.
We can’t predict the future but we can avail ourselves of methodologies that will provide the highest probability of success. It is far more pleasant and professional to employ a proven successful approach that avoids common errors.
One of my favorite writers in modern finance is Peter L. Bernstein. The excerpts below are taken from his wonderful book “Against the Gods, the Remarkable Story of Risk”.
I often bring these remarks to mind when I hear someone claim that this time things are different or that they have some exclusive insight into the machinations of our incredibly complex capital markets.
Uncertainty - is where the wild things are.
Chapter 19: “Awaiting the Wildness”,
» “The past seldom obliges by revealing to us when wildness will break out in the future. Wars, depressions, stock-market booms and crashes, and ethnic massacres come and go, but they always seem to arrive as surprises.”
» “If these events were unpredictable, how can we expect the elaborate quantitative devices of risk management to predict them? How can we program into the computer concepts that we cannot program into ourselves, that are even beyond our imagination?”
» “Even though many economic and financial variables fall into distributions that approximate the bell curve, the picture is never perfect. Once again resemblance to the truth is not the same as truth. It is in those outliers and imperfections that the wildness lurks.”
» “The science of risk management sometimes creates new risks even as it brings old risks under control. Our faith in risk management encourages us to take risks we would not otherwise take.”
» “Nothing is more soothing or more persuasive than the computer screen, with its imposing arrays of numbers, glowing colors, and elegantly structured graphs. As we stare at the passing show, we become so absorbed that we tend to forget that the computer only answers questions; it does not ask them."
"Whenever we ignore the truth, the computer supports us in our conceptual errors. Those who live only by the numbers may find that the computer has simply replaced the oracles to whom people resorted in ancient times for guidance in risk management and decision-making.”
» "Surprise is endemic above all in the world of finance."
end of excerpts.
With these thoughts in mind we proceed with care and good sense as we convert our valuable human capital into abundant and sustaining financial capital.
The Know Thyself Rule
Thinking of trying your hand at investing? Take a tip from the ancient Greeks.
Visitors to the
Know thyself
That simple bit of advice is essential when it comes to successful investing.
Successful investing has to start with knowing yourself. You need to have a clear idea of what you want to achieve, the time horizons you have available to reach life goals, the cash you will have to help you reach them and your personal tolerance for risk. All of these things factor heavily into achieving your investment objectives.
