September 7, 2008: Uncertainty

It's easy to think that you know what the future holds - whether inflation will rise or fall, which investments will do well and which poorly, what the political shape of the U.S and the world will be in a few years, etc.

But the future invariably contradicts our expectations. Often you can be correct in your general expectations, but wrong about the specifics - so that investments you bet on don't work out.

Over and over again we are proven wrong when we bet too much on our expectations, and yet each time we're tempted to believe we have found a "sure thing". Sure things don't exist in the real world. Every economic event results from the motivations and actions of literally billions of people. To assume that you can predict what all those people will do is not only presumptuous, it is dangerous to your financial health.

There is no way you can eliminate uncertainty or obtain exclusive direct contact with the future. You have to let the future unfold as it will. Uncertainty is a fact of life.

One does have expectations. You believe that some things are more likely to happen than others. It would be foolish to treat those expectations as certainties. It would be equally foolish to ignore them, since disregarding them would leave you exposed to the dangers you see and unable to profit from what you believe will happen.

Uncertainty doesn't mean that you know nothing at all - that your opinions have no merit, or that you are helpless to prepare for the future. It does mean that you should allow for surprises. Never take anything for granted and never treat an investment as a sure thing.