“Predictions are hard, especially about the future.”
Given the flaws and miserable results of investment prognostications, we don’t believe in using forecasting and predictions in our investment strategy. Instead we rely on well-vetted, time-tested, reliable principles. To paraphrase Jeff Bezos, ” it may be impossible; to predict the future, but we can do know what things won’t change”. For instance, it is difficult to imagine a world in the future, where consumers wouldn’t want to pay less for an item, or wouldn’t want it delivered faster. Hence, Amazon focuses it energy in honing customer experience, lowering prices, and hastening delivery. Similarly, we believe in certain investment “truths”.
You can build a business strategy around the things that are stable in time. It’s impossible to imagine a future 10 years from now where a customer comes up and says, “Jeff I love Amazon, I just wish the prices were a little higher.” Or, “I love Amazon, I just wish you’d deliver a little slower.” Impossible.
So we know the energy we put into these things today will still be paying off dividends 10 years from now. When you have something you know is true, you can afford to put a lot of energy into it.
Stoics’ concept of the ‘inner citadel’, a core set of beliefs that you depend upon.
Investment success is largely a “loser’s game”. Like recreational tennis, the winner is usually the defensive player who avoids unforced errors, not the aggressive player who seeks killer shots. Similarly, in investments, the winners are usually conservative investors who can avoid the major errors– complex strategies, high costs, leverage, etc. Risk management is the management of uncertainties. What if we invert the problem? Maybe we can gain some insights. In investing, what are the certainties we know; or at least, what are the assumptions we can faithfully rely on?
–> Link to Degrees of Nuance/ Abstraction
100.0%: certainty
- Change is the only constant.
99.99% (4th order): near certainty???
- The sun will shine tomorrow.
- At some point, everyone of us will die.
- I think, therefore I am.
99% (3rd order): extremely confident
- Vaccination works.
95% (2nd order): very confident
- Contrarianism (or “be fearful when others are greedy; be greedy when others are fearful”): greed and fear are basic human emotions, evolved through time to protect us, and frequently unconscious and immutable.
- Study history: “The more things change, the more they stay the same.” History may not repeat, but it rhymes. As a group, human beings’ behavior is highly consistent
- Reversion to the mean: things are cyclical. Good times for too long, sows its own seeds of destruction through complacency. Conversely, bad times for too long, births innovation through dissatisfaction.
- Incentives drive the world: incentives are the strongest forces for human behavior. Investing success is largely a result of favorable behavior
- Positive expectations: over the long-term, market returns are positive. People are fundamentally good and want to improve their lives, which drives progress through time, which in turns drives the market higher.
80% (1st order): confident
- If you work hard, you will succeed.
- People dislike uncertainty: aside from adrenaline junkies and daredevils, people prefer certainty over risk, especially for significant, visceral, impactful (e.g. fearful) events. That is why insurance companies make money.
60%:
50%:
- Routlette: betting over time
- Head or tails