In a world full of uncertainty, it’s only human to seek clarity and strong opinions. That’s why, particularly in an area like investing, people will often gravitate towards people who appear to have all the answers. As JOE WIGGINS explains in this video though, the pursuit of certainty can be very problematic for investors – as economics, politics, and financial markets are inherently hard to predict.
TRANSCRIPT
Robin Powell: In a world of uncertainty, human beings crave the very opposite. We naturally warm to people with strong opinions, and who appear to have all the answers. It’s a tendency that investors are particularly prone to.
Joe Wiggins: Life and particularly the financial markets are incredibly complex and uncertain and that’s uncomfortable. So we’re drawn to people who remove that confusion – or supposedly remove that confusion – by having an opinion or a view. So when we’re worried or anxious, it makes us feel better if someone has a strong view or perspective because it makes us think that things aren’t chaotic – they aren’t random, they’re actually controllable. We can see this in investment all the time that we want people to have views over the short term on markets, even though they’re inherently unpredictable, because it makes us feel better.
RP: In some areas of life, having a definite view could be seen as a positive thing. The problem is that economics, politics, international affairs and so on are very hard to predict. Consequently, so are financial markets.
JW: There is so much in financial markets that is inherently unpredictable, particularly over short time horizons. So if we’re predicting and having views on things that are unpredictable, then we’ll trade too much, make poor decisions that will cost us money. There are certain things in investment that we can predict or have more confidence in predicting, like the power of compounding over time, like the benefits of long term investing in equities, for example; but most things in investment are very unpredictable and uncertain. Therefore, if we have views on them – strong views on them – we’re likely to be wrong footed and that could cost us.
RP: The legendary investor Warren Buffett has spoken and written several times about our circle of competence. It’s an important concept to grasp. You need to have a clear idea about what you know, but also about what you don’t know.
JW: So is it reasonable for me to have a view on what the FTSE All-Share will do over the next three months? Or what the Federal Reserve will choose to do about interest rates at the next meeting? Is it something that’s inherently forecastable or predictable? Should I have a view at all? And in many cases, that’s not predictable – so we should avoid doing that. It’s not ignorant not to have a view, it’s actually sensible to have an awareness of things in financial markets that are inherently unpredictable and difficult to forecast.
RP: As Joe Wiggins says, not having a view doesn’t mean you’re ignorant; it means you’re realistic. The financial markets are very hard to beat. Don’t assume that you have the ability to beat them, or that someone else does.
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