Certain Uncertainty: Embracing the Chaos
By Randy Kaufman, with research assistance from Dustin Lowman
As a wealth advisor who prides herself on listening to and understanding people, I feel that I often have a privileged look into my clients’ minds. Unfortunately, what I often find is a tangled knot of discomfort, dominated by their abject paralysis in the face of uncertainty. It is not a pretty sight…
Complexities of life aside, the list of uncertainties in the markets is vast: unpredictable interest rates, credit risk, earnings, politics, multiples, policies, psychology, and, of late, pandemics — to name a few. News channels, operating under the “If it bleeds, it leads” mantra, bombard us with violence, economic volatility, cyber warfare, and government corruption (all among Americans’ greatest fears). When people sense uncertainty — and uncertainty is, to varying degrees, always with us — they search for patterns in randomness, grasping for security, trying to predict the future, so they can sleep at night.
According to Daniel Kahneman, Nobel laureate economist and author of Thinking Fast and Slow, humans have a “sense-making” mechanism that allows us to see the world as more tidy, predictable and coherent than it really is. “The illusion that one has understood the past feeds the further illusion that one can predict and control the future,” he says. “These illusions are comforting. They reduce the anxiety that we would experience if we allowed ourselves to fully acknowledge the uncertainties of existence.” Comparably, in the words of philosopher Friedrich Nietzsche, “Danger, disquiet, anxiety attend the unknown — the first instinct is to eliminate these distressing states. First principle: any explanation is better than none … .”
I struggle with the uncertainties of life as we all do. But among the benefits of aging is newfound comfort with the unknown. If we learn to cope with our fundamental abhorrence of an uncertain world, can we harness our fears, control our impulses, and become better investors? Can we decrease our existential dread, and prosper rather than agonize? Believing that we can is a core tenet of my advising.
Predicting Unpredictability
Supposedly, investors hate uncertainty more than most. How ironic, given that uncertainty is a constant companion to investing. Experts across the map say as much:
Jason Zweig, decorated financial columnist and author: “Uncertainty is the only condition investors have ever faced, or ever will, from the moment barley and sesame first began trading in ancient Mesopotamia to the last trade that will ever take place on Planet Earth.”
Howard Marks, co-founder of Oaktree Capital: “Several things go together for those who view the world as an uncertain place: healthy respect for risk; awareness that we don’t know what the future holds; an understanding that the best we can do is view the future as a probability distribution and invest accordingly; insistence on defensive investing; and emphasis on avoiding pitfalls.”
Warren Buffett (no intro necessary): “Of course, the immediate future is uncertain; America has faced the unknown since 1776. It’s just that sometimes people focus on the myriad uncertainties that always exist while at other times they ignore them (usually because the recent past has been uneventful).”
Buffett, who bought his first stock shortly after the attack on Pearl Harbor, has as much authority on the matter of uncertainty as anyone. Over the course of a 70+ year investing career, he has witnessed wars both hot and cold, assassinations, oil and financial crises, attacks on American soil, and, of late, a global pandemic. The COVID-19 era has witnessed markets tailspin, then recover, then dip again, then set single-day record gains, in a decidedly unpredictable pattern. Last year, in the midst of a record-setting bull market, Buffett warned that we were due for a “megacatastrophe.” When COVID-19 hit, he encouraged investors to brace themselves for a long recovery, stating: “You’re going to get a fine result if you own equities over a long period of time.”
He added, “The American miracle, the American magic has always prevailed, and it will do so again.”
“Omaha, Omaha!” (Planning for Audibles)
Embracing the unknown raises the obvious question of whether we should bother to plan at all. If there’s nothing but chaos before us, what good is our puny systems of logic? Shouldn’t we just throw all caution — and foresight — to the wind?
Asking that is akin to asking a pilot if she should even do a flight plan given that the weather is highly unpredictable, or telling a sailor to stay moored, given the fickleness of the wind and the waves. We can and should plan. Like Benjamin Franklin said, “By failing to prepare, you prepare to fail.” Planning is the only way to get where we want to go. But we should recognize — like all good investors do — that our plans will be tested, and therefore, should be flexible.
Think of a quarterback just before the snap. He’s just called a play in the huddle, but if he sees something in the defense that troubles him, he calls an audible, and his team knows how to adjust. This, of course, is built into the play he called. It’s a contingency plan. The most skilled shot-callers take it a step further, calling fake audibles, to confound defenses. Point being: At the highest level of any science/art (and investing is certainly both), plans account for unpredictability, and change when the unknown rears its head.
Knowledge is power. You may not be able to predict what’s to come, but with the right tools, you have a better chance of making clear-headed decisions and course corrections. Providing clients with these tools, along with a steady hand to hold during volatile times and a beating heart that feels their pain, are among the most valuable things good advisors do.
Final Thoughts
I urge you to do the only thing that makes sense in light of the reality in which we are living: Leave the state of denial that promises you that, if you try hard enough, you can predict (and therefore control) future events. Embrace uncertainty. Realize that it is like oxygen to humans and water to fish — it is what surrounds us, all the time. It is to be befriended, not feared. No one can predict market changes, presidential elections, or the behavior of others. Good advisors and profitable investors understand this. In the face of fear and unpredictability, they stand tall and adjust course as necessary.
Take it from some legendary generals:
“The present situation is to be regarded as one of opportunity for us and not of disaster. There will be only cheerful faces at this conference table.”
“Hell, let’s have the guts to let the sons of bitches go all the way to Paris, then we’ll really cut ‘em off and chew ‘em up.”
“Neither a wise man nor a brave man lies down on the tracks of history to wait for the train of the future to run over him.”
As always, please do not hesitate to comment below with questions or comments.
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