The Power of “I Don’t Know”

“Manish, what’s your view on the US Markets?”

I said “I don’t know, It’s too confusing out there”

He replied “That’s very disappointing. You are a CFA and a Wealth Advisor, you ought to know.”

I had no words for people’s expectations of me being the Nostradamus of US Markets.

“I don’t know” – when did this become a wrong statement? Is it that people are so scared of uncertainty that they would believe anyone with some view, some glimpse into what is going to unfold tomorrow? Or is it that people believe a lie about someone’s abilities and keep looking for confirming evidence of that lie to uphold?

There are very few things in life that one can know with absolute certainty. I know working out is good for my health, I know that a good sleep of 7-8 hours does wonders to my productivity the  next day, I know that Titan is a very good business, and I know that Warren Buffett has inspired millions of investors globally.

But will Titan be in business even 25 years down the line? There is a high probability of it but no certainty. Will Buffett get his bets on Occidental Petroleum or NuBank in Brazil right? I don’t know. Will I live till 100 if I worked out, slept well, and took care of my health? I don’t know for sure. I hope so.

But there are many things that just cannot be known. What will be the stock price of Titan 3 months from now? What will the inflation numbers be next quarter or next year? How high will  interest rates go in the US? Will stock ABC be a 100-bagger if you hold on for the long term?

If you have read about black swan events, then you would know that these are unknown unknowns and it may give you an impression that these events happen once in a blue moon. This could be comforting to know as it makes the process of investing look doable, predictable, and a seemingly smooth ride. But that might be the very illusion that seduces traders, speculators, and active investors into chasing mega riches in the stock markets, eventually
crushing their hopes with regular flair.

Just look at the last few years – demonetization, COVID pandemic, Russia-Ukraine war, US Fed Rate hikes, Oil Futures going to 0, European industry shutdowns – these are all uncertain or unknowable events with ramifications across global markets. And all of these have happened in just the last 4 years.

Black swan events are events that no one could have predicted or even seen coming. Uncertainties or unknowable events are very difficult to measure up and plan for, as the range of outcomes could be very diverse. Either way, there are so many moving variables affecting the price movements of securities in capital markets, that it would be impossible to state with significant confidence that this particular stock will be trading at this price in 3 months’ time. Hence I find the Target Price (TP) on research reports very misplaced.

It may signal the effort gone into analyzing the company and the extreme usage of Excel and its various functions. But what it misses out on is the possibility of an event that could nullify the very thesis upon which the TP has been based on.

The bizarre part of many sell-side institutions is that the TP changes immediately in response to events nullifying the thesis in the report provided earlier. This would be fair if uncertain events were rare, but they are not. The world has only become more interconnected, making the systems very fragile and vulnerable to constant disruption and challenges from places that aren’t being studied or analyzed.

Byjus was the poster boy decacorn for Indian startups just yesterday, and today the whole facade is coming down on the financial acrobatics they used to get here. Facebook was the biggest ever advertising business globally until Apple’s ATT gave a knockout punch to their entire business model. Zomato was the success story of the WFH phenomenon, but increasing interest rates have made the erstwhile cash burn unsustainable.

The future may look rosy but it may not turn out to be (2021). The management may have shown promising signs but could slip again into their old habits (DHFL). The industry could be  surfing on a tailwind, only to be tossed off balance due to global uncertainties (IT). The country may have the highest growth rates, but its stock performance could turn out to be dismal (China).

As Morgan Housel put in a recent newsletter, “The inability to forecast the past has no impact on our desire to forecast the future. Certainty is so valuable that we’ll never give up the quest for it, and most people couldn’t get out of bed in themorning if they were honest about how uncertain the future is.”

It just isn’t easy to figure out the future. Anyone who claims the contrary may just be lying.

So be watchful of all the fortune tellers selling courses online that will turn you into the nextWarren Buffett or Rakesh Jhunjhunwala. Be skeptical about the youtube influencers who have already seduced a lot of millennials to lose money on various crypto-related projects. When you meet anyone that claims to have superpowers to see in the future and predict events, just pick up your wallet and run.

It seems like overconfidence and storytelling have gripped the psyche of investors looking for low-hanging fruits, and they’re willing to bet their house on them.

Please don’t become one of them.

Look for people who are honest about the knowledge they have and are aware of their limitations. Look for people who don’t hesitate to state “I don’t know”. Look for people who say NO to most things. Look for people with a process in place and the discipline to stick to it.

There are many out there. You will find them if you just raise your standards high enough for letting quality people enter your zone.

All the best for finding them out. They aren’t waiting for you but they will be happy to meet you.

Disclaimer: “Any views or opinions represented in this blog are personal and belong solely to the author and do not represent views of CFA Society India or those of people, institutions or organizations that the owner may or may not be associated with in professional or personal capacity, unless explicitly stated.”

About the Author

Manish Gvalani is a CFA charterholder and Masters in Finance from KJ Somaiya. He has worked in Portfolio Advisory roles across many international banks eg. SCB, Citi, and BNP Paribas. Currently he is working with Dubai’s biggest bank, Emirates NBD. He is passionate about Snooker, dabbles in bio-hacking and is a voracious reader. His favourite books are “Letters from a Stoic” by Seneca and “Snowball” by Alice Schroeder. He has a weekly newsletter called “Psychology of Investing” wherein he covers topics related to behavioural finance, long term compounding and longevity. Weblink for the same is https://manishgvalani.substack.com He lives with his wife, and parents in Dubai.