You Invest Based On How You Expect the Future To Work

The future is unknown and may turn out quite different from what any of us expects. Can we use that to single point of knowledge to improve our prospects of investment success?

The Black Swan Condition

Taleb pointed out that “Black Swans” – rare events, happen regularly but not predictably. Given they are rare and given the huge number of events that occur, we are little better off for knowing the fact.

Nonetheless, the fact informs how we invest. The implicit questions we address are “How can I win?” and at the same time in the same unpredictable environment, “How can I avoid loss?”

These are not easy questions, and given the unknowable nature of the future, are incapable of precise answers.

Predicting the future and having sharp-edged plans to achieve your goals is impractical. That’s the reason socialism doesn’t work. Socialism relies on the idea that it is possible to know or make the future certain and adapt to that knowledge appropriately. Another word for that is delusional. Just adapting to your belief changes how the future  can unfold.

Let’s assume there will be a market to invest in.

You can tend towards highly predictable or highly random. If you buy a bond or bank term deposit, your future is highly predictable. The chances of getting back less than you expect is not zero, but small. The chance of getting back more at maturity is exactly zero. The only absolute guarantee you have with such an investment is the most you will get back.

At the other extreme there are businesses like Apple on 16 September 1997, the day Steve Jobs became CEO for the second time. The split adjusted price then was 20 cents. If you bought then and kept it, you would have made 865 times your money and some dividends along the way. More than 30% compounded. That result was not predictable. The Apple story includes a date that included greater predictability. The sixth of March 2009. The bottom of the 2008 meltdown. You could have had Apple for $3.05.  How much did you buy? Same as I did right? None. Why not? You knew about iPhone, iPod and the creativity of the business, but the recent past intruded.

It dominated our thinking. While the world might not have been ending, you could see the flames outside the window.

The important factor is how relevant is the past in your decision making. If you use only a little of it, like the last year,  you will favour guarantees and predictability unless the market is up. If you use a lot of it, say 50 years, you could invest based on future prospects. Market share, product line, financial capability, leadership, competitors capability.

Assessing the future alone, Apple is not a sure thing, but you would likely get your money back with some. dividends in the interim. You won’t get 50 times your money back though

Amazon is in the same place.

The moral of that story – Apple was a growth stock, but now is not. It is in the middle and toward the value end. Buffett didn’t buy any until it became a mostly value stock. It is a like a bond with an upside.

A test on the point

Where is Tesla? Could you get back 50 times your investment or might you get back nothing? Zero is not impossible according to some investors. Fifty times is even less likely. It is not much like a bond.

Where to next

You must know how you want your investments to behave before you can decide what to invest in today. There is a vast difference between Tesla and Apple. There may be one or two that 25 years from now will look like Apple or Amazon. The problem is there are thousands of possibilities. Of those almost all will disappear before 25 years.

Not an easy to problem to solve. If it were easy, the opportunity would not be there either.

Think about your particular risk approach.

When you know what you are trying to do, the solutions become easier to see.

The bits to take away.

When you know what you are try to do and why you are doing it, you limit the range of acceptable processes. When you know yourself and the markets you can decide. When it is a game with money as a number used to keep score, the outcomes becomes less predictable.

 

 


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I build strategy and fact-based estate and income plans. The plans identify alternate ways and alternate timing to achieve both spending and estate distribution goals. In the past I have been a planner with a large insurance, employee benefits, and investment agency, a partner in a large international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business. I have appeared on more than 100 television shows on financial planning, have presented to organizations as varied as the Canadian Bar Association, The Ontario Institute of Chartered Accountants, The Ontario Ministry of Agriculture and Food, Banks – from CIBC to the Business Development Bank.

Be in touch at 705-927-4770 or by email to don@moneyfyi.com

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