When we concentrate on the small part of the things then we acquire more knowledge regarding particular aspects. We need to work harder and harder to develop our skills by which we can able to know more than another person. Enhancing knowledge will be work like an edge for us to knowing our positions better than others.
Also, we try to identify that where we currently stand, what’s our actual position so that we can prepare ourselves for the further development.
When we predict upcoming changes then we can able to earn money from participating in that changes. But if we have predicted something which is not going to change then it will be near to impossible to earn money. If things do not go to change then we cannot able to earn money by taking benefits of those changes.
It’s very difficult to forecast future and people generally forecast future with regard to what has happened in the past.
So that forecast can get right some of the time but it should be consistent in the getting right every time which can be very difficult.
Some of the people stick to always bullish or always bearish view and keep that view for a longer period. So that sometimes they get right with their forecast. It does not mean that their forecast will be right all the time. If you toss coin 100 times then there are a half of the possibilities to get the head of the coin. We cannot say such outcomes as a consistent outcome.
We have to check that how many forecasters have predicted meltdown of subprime crisis or again boom was driven due to huge domestic liquidity currently.
Forecasters are called as “I know” school of investors. They are more confident about the future and the things will work out as per their assumptions.
“I don’t know” group of people can able to guard themselves while they have to deal with the future at the macro level.
We never want to invest for the future which is largely unknowable and on the other hand, we need to face unforeseen future without forecasting the future.
The biggest problems arise when we forget the difference between probability and outcomes. We cannot surely know the occurrence of future events but we can know the probability of the occurrence of the events. When we forget the difference between probability and outcomes then we start predicting future events with surety.
Investors who ignored such limitations then they make mistakes in their portfolio and also incurred huge losses. Events do not always occur as per our assumptions and we have to be ready for it.
When we do not know the future then we act in a different manner such as we diversify, hedge to the position, taking less leverage, focus on today’s value over a future growth, etc. On the other hand, while we feel that we know the future or future event will occur as per our assumption then we start taking more risk, taking more leverage, play on making an assumption of bright future. If we know the future then we play an aggressive game. We not take a diversification and take a huge leverage.
When we know that there will be no obstacle comes to our way while we are driving then speed, carelessness will increase. And on the other hand, when we know that our way is clear but any obstacle can come on the road anytime then we drive the vehicle more carefully with a speed which we can able to control. Similarly with the investment, when we believe that future is knowable then we behave for investment in a different way and when we believe that future is unknowable then also we behave for investment in a different way.
As the road is clear while we are driving but anytime any vehicle can come to that road and we can able to meet an accident if we do not have a control over our driving. Similarly, if we do not have a control over our investment then any unforeseen event can destroy our wealth. We need to wear a helmet while driving for controlling risk and also take proactive steps while making an investment for guard ourselves against unforeseen accident.
Read for more detail: The Most Important Thing Illuminated by Howard Marks