Over the weekend, a NATO general was asked by a bright-eyed reporter whether or not the various flying objects that were being shot down might be aliens visiting from elsewhere in the galaxy. His throwaway response of “We don’t rule anything out” was sufficiently ambiguous to set the conspiracy theorists atwitter. “Of course, they dropped this during the Superbowl, when no one’s paying attention,” was the LOL tweet.
More important than UFOs1 is the intriguing process by which humans sift through a morass of conflicting information. I believe proficiency in this ability is an important life skill and is especially important to investors.
Why? Consider this definition: “Investing is the art of using imperfect information to make probabilistic assessments about an inherently unknowable future.”
That not only applies to investing, but to any endeavor where information is limited and/or conflicting, where process matters a lot, and where even good decision-making can lead to unfortunate outcomes. War, money, health, sports, and business all fall under this penumbra.
Let’s take a closer look to see what there is to learn:
Seeing Through the Fog: It is a skill to be able to make sense of evolving, contradictory and confusing information. Very often, the first read of paradigm shift is incomplete or misleading. More details emerge over time, and the fuzzy picture comes into sharper focus. The challenge is that by the time the fog clears, the battle is usually over.
A skeptical but rational approach can help. It can be useful to think like a court room lawyer: Is that witness biased? What is motivating them? Is the Pentagon an objective player here? Is this a reveal of alien invaders, or a not so subtle form of lobbying for more federal dollars?
Reducing the noise level in your process helps. “Yet to rule out” tells you very little versus “we believe that.”
Bet Favorites, Not Long Shots: Investors must remember that low probability events are less likely to occur than high probability events. This is an obvious but overlooked truism. Volatility is going to occur frequently, modest drawdowns on occasion, bear markets every few years, and full-blown market crashes quite rarely.
When considering the future, you must consider what is likely to happen, as opposed to what could possibly happen. How likely are you to find the next Apple, or pick the next Peter Lynch as your fund manager, or catch the top or bottom? (Not very).
We spend far too much worrying about Black Swans than the mundane. Instead of stressing about shark attacks, you should manage your blood pressure and cholesterol. Similarly, excess fees and overtrading are more likely to hurt our portfolios than crashes.
Stop Fighting the Last War: I have a vivid recollection of being offered “Downside protected S&P500 notes” early 2003 (from Lehman Brothers), after the dotcom crash, with the Nasdaq 100 down about 80%. Thanks, but you are about 3 years too late.
This reminds of earthquake insurance problem: After a big one, sales of these policies spike — just as the odds of another quake go down precipitously. Investors tend to become more risk-averse following market volatility, and risk-embracing as stocks go higher. This explains why most surveys are useless; they tell you more about what has happened recently than what an individual is actually thinking.
Understand What You Don’t Know: We know from the Dunning Kruger effect that our ability to self-evaluate our abilities is strongly correlated with our specific skills in that space. What expertise do you believe you possess about cosmology, aviation, drones, and military tactics? What you do not know about astrophysics alone would fill shelves of textbooks.
Good investing demands humility. You do not have to have an opinion on everything. We would all be much better off if we learned to say “I don’t know” a little more.
Strong Opinions, Weakly Held: Despite the best of approaches, you will frequently be wrong. This is not a bad thing, it is part of the learning process. The trick is to admit the error and reverse your prior opinion. Perhaps there are even applicable lessons to the future.2
Maybe Aliens are in our skies, but probably not. As a fan of Star Wars/Star Trek/Dr. Who, I would love to find evidence of intelligent extraterrestrial life. However, I am forced to recall Carl Sagan’s sage admonition: “Extraordinary Claims Require Extraordinary Evidence.”
Welcome to the UFO wars (Noahpinion, Feb 14, 2023)
Swarmed Navy Destroyer Had Its Bridge Illuminated By Mysterious Drones (The War Zone, Oct 14, 2022)
Glowing Auras and ‘Black Money’: The Pentagon’s Mysterious U.F.O. Program (NYT, December 16, 2017)
Judgment Under Uncertainty (March 25, 2022)
Investing is a Problem-Solving Exercise (January 31, 2022)
Learning to say “I Don’t Know” (September 9, 2016)
You Are Worrying About the Wrong Things (October 22, 2014)
The Fine Art of Being Worng Wrong (April 26, 2013)
The many hats of great investors (May 28, 2011)
Strong Opinions, Weakly Held (July 24, 2006)
Expect to Be Wrong in the Stock Market (April 5, 2005)
1. For most of Human history, when a technologically advanced civilization encounters a vastly technologically society, it usually means extinction for those with inferior tools and weapons. See The Three-Body Problem for what occurs when first contact with Aliens is made.
2. For too many people in the investing world, this remains an anathema. I credit Ray Dalio for first bringing this to the forefront in investing.