Uncertainty is welcome here

There are no certainties in life, of that you can be sure.

However, if there is one area of endeavor where the perceived value of being sure is highest, that is in the world of investing. Just how many financial press advertisements or investment newsletters with the following taglines have you seen lately?

Unbeatable system guarantees 10% annual returns!

Beat the market with no effort!

Learn to trade like the pros, maximum return with minimum risk!

Whilst undoubtedly appealing to the average (and not so average) folk, messages such as these should trigger a knee-jerk reaction to run a mile in the opposite direction. If I am not mistaken, one of the most recent “examples” of a constant gradient, 10% annual price appreciation curve was provided courtesy of a certain Mr. B. Madoff… This would suggest that steady “certain-like” investing returns are indeed a rare breed.

And yet, it’s not so easy to walk away from marketers touting appealing track records (no matter how brief they might be). So, you may rightly ask, are we simply too gullible to stand a chance of selecting the right investment fund/manager?

Not really.

Humans are drawn to certainty and “black or white” decisions. Since the dawn of time, our species has sought the guidance of leaders as a source of protection and eventual well-being. Typically, over the ages, we have renounced our own criteria and taken comfort in the views of others whose own vision was shrouded in an aura of certainty. That is, we place our trust on those driven by a cause or mission deemed to be “certain”.

Consequently, uncertainty, or its related cousin, ambiguity, continues to be perceived to his day as a flaw to be eradicated. This is most glaringly apparent in the money management business today. Can you picture you typical equity or fixed income fund manager actually admitting their concern over a list of possible outcomes from their investment decisions? To most, this would be akin to committing commercial suicide.

But not to all.

Although clearly counter intuitive, the notion of being unsure is a pre-requisite to long-term investment outperformance. To quote the always eloquent, Seth Klarman:

“There is value in not being sure”

Think about it for a moment… how do you act when you are not sure about the potential outcome of your decisions? Whether you are purchasing a new refrigerator or selecting a school for your kids, you most probably consider multiple factors, probabilities, and consciously or not, assign weights to the likelihood of each possible “outcome” as a result of your decision. Such “common sense” like behavior effectively reduces your risk without completely eliminating it.

Applying the same patient process to investment selection should deliver optimal results despite the lack of certainty. By digging a little further in your elusive, never-ending search for complete information you probably establish a range of values for your valuation parameters, erring on the conservative side.

Accepting the fact that perfect information is a utopian concept , you will probably practice a minimum of diversification in your investments, allowing for the fact that you may, after all, be wrong or just plain unlucky!. And yet, admitting the inherent uncertainty of the investment pursuit is the cornerstone of a rewarding investment experience.