US Secretary of Defence, Donald Rumsfeld famously commented:
‘There are known knowns; there are things we know we know. We also know there are known unknowns... But there are also unknown unknowns — the ones we don't know we don't know… it is the latter category that tend to be the difficult ones.’
Like it or loathe it, uncertainty is ever-present. Most people inhabit only the world of the known. They fear things that they know they don’t know, and are almost oblivious to the things they don’t know they don’t know.
This is a dangerous approach to life. Stop for a moment and consider what you actually know. In almost any scenario what we ‘know’ represents only a tiny fraction of the total number of variables that will impact the outcome of any event.
So what? If I don’t know that I don’t know, what’s the point in worrying about it? Clearly we cannot account for all the unknown variables and attempting to do so simply leads to indecision, lack of direction and stagnation.
Nevertheless, recognising that there is much we don’t know, is the first step to achieving better outcomes. 22 years as an investment manager has taught me that to succeed we must manage uncertainty, the unknown unknowns. This is true of investing, but applies equally to business, the economy and nearly every aspect of our daily lives. So here are my 7 tips to managing uncertainty:
You cannot go anywhere without stepping into the unknown. There are no strategies that can eliminate risk. Accept it. Embrace it. Holding your wealth in cash, for example, may seem the safe option. In fact, it is one of the riskiest investment strategies of all, almost guaranteed to erode your wealth through inflation.
To succeed we need to understand our goals. Some goals are near term but most are fairly long term. It is easy to get lost in the noise of short term events, particularly with stock markets. Be clear about what you want to achieve. Set ambitious long term goals and use events to steer towards them. What feels like a disaster today can equally be seen as an opportunity. Stock market crashes, for example, are the perfect definition of a Black Friday sale!
You can reduce uncertainty through exploration. Examine all options. Ask the obvious questions. Turn over plenty of stones. Deliberately venture outside of your comfort zone. Seek the views of those who may disagree with you. Good investors are like cautious explorers. Persistent enquiry and an open mind will keep you on the path to success.
You will not be the first to tread this path, so take an experienced guide with you. Seek the best advice you can afford. Demand value from professionals, of course, but the notation that ‘cheap is best’ is utterly absurd. Would you buy a cheap parachute? No. Would you use Google search for methods on how to treat a broken bone? Neither should you trust in Google research to achieve your life’s goals or manage your wealth.
The only genuinely ‘free-lunch’! To manage uncertainty we must diversify our risks. Run multiple strategies, avoid excessive risk concentrations and maintain contingencies. Many investors end up reflecting their ‘known’ views through every investment. This can lead to a portfolio that seems diversified on the surface, but is acutely vulnerable to one or more risks. A truly diversified portfolio will balance many independent risks. Not everything will be going up at the same time – that’s the idea.
Don’t get fixated or emotionally attached to your strategies. This can lead to paralysis and a ‘head-in-the-sand’ approach to investing, which rarely achieves the best outcomes. To succeed we need to be nimble and adapt to an ever changing environment. Retest your views in the light of what is now known. Be careful not to get shaken out of positions just because markets are turbulent. Maintain perspective and look for opportunities in the investments you believe in, but equally, don’t be afraid to cut your losses early and reinvest in more profitable strategies.
Uncertainty, by definition, means that some decisions will not work out as intended. This is not a bad thing, it is to be expected. Mistakes are like signposts pointing you in the right direction. Don’t get down about them. Instead, work patiently to understand what’s going wrong and learn from it. Learning is iterative, not final. Turn your weaknesses into strengths and incorporate that learning into your future strategies.
Disclaimer: The views thoughts and opinions expressed within this article are those of the author, and not those of any company within the Capital International Group (CIG) and as such are neither given nor endorsed by CIG. Information in this article does not constitute investment advice or an offer or an invitation by or on behalf of any company within the Capital International Group of companies to buy or sell any product or security.