Uncertainty & Luck

Before writing this blog I want to pay my respects to the late investor Charlie Munger(1924-2023). Charlie Munger always spoke words of wisdom, he was inspirational to me and a bunch of other investors out there. Lets have a moment of silence before beginning this blog.

Introduction 

In my previous blog I left subtle hints and if you followed the trace you would know what today’s topic is going to be about. Yes, it’s about Luck & Uncertainty. I’d really be glad if you got that right because it shows your enthusiasm and curiosity as a reader and how enticing the topic is to you personally. Anyways there’s also one very essential thing I need to do before starting this blog, that is to know wether or not you and I are on the same page. For everything to make complete sense I want you to acknowledge the fact that some things are in our control whilst some aren’t but what that X factor brings in our life is mostly dependant on our actions plus our destiny and not solely our destiny or on our ability to predict the future, so acting according to “what will happen” is useless to a certain degree. We can’t prepare for what’s coming either all we can do is try and tilt the odd’s of our destiny in our favour, I believe we can play with probabilities not predictions. 

Uncertainty friend or foe

Warren Buffett has a saying, “Forecasts may tell you a great deal about the forecaster; they tell you nothing about the future.”

There’s no way for anyone to know what is going to happen next and when it will happen this is the foundation on which the concept of uncertainty lies on, however neglecting this and making predictions can only mean one thing, that is the forecasters pockets have to be aligned with the forecast being true. Making this prediction or forecast doesn’t require much skill and even if the forecaster is correct in the end they end up mistaking luck for skill. With every binary prediction comes a 50/50 chance of the forecaster being right even though they are right doesn’t mean that the forecaster is highly skilled and accurate, 10 good forecasts doesn’t mean that either, it only means good luck. 

We see people trying to predict the markets all the time, we see economists trying to predict the next economic boom or recession all the time and every time we see that they are wrong. Let’s be realistic the dot com bubble of 2000 was never going to continue neither was the housing boom of 2008, now you can argue that it’s easy to say after all these years but during that time when the bubble was at it’s peak the economists chose their usual forecasts claiming that the housing boom in the US will reach new heights all because their compensations depended on it, their status in society depended on it and needless to say they may have stopped looking for flaws in their theory after the first high was broken because why do your job when you are getting compensated for saying what the world wants to hear. In the markets brokers have a similar approach they don’t care what you buy, just the fact that you’re buying something keeps business going. It is easy for your broker to tell future limited is going up 10% because he has no skin in the game all he care’s about is his commission. All in all forecasts are made because they align with the forecasters pockets. 

Of course there is a way to stay immune from all of this that is to believe that Mr market can go up, down and sideways (everything) at all times, indirectly you need to first be immune to volatility and contrary to market opinion you need to embrace the fact that the market can’t be timed nor predicted. The only thing you can do is to increase your odds of being at the right place at the right time by following a process and working on it. Let’s take the game of cricket as an example, a batsman has no clue which ball the bowler is going to bowl next but he knows that he can pull a bouncer for a boundary or clear the ropes with it. To take advantage of that one bouncer in the over, the batsman needs to have a stable stance and a good technique, he needs to leave or defend all the good balls and he needs to lure the bowler in bowling the bouncer, now doing all this is the process behind facing a bouncer and clearing it but don’t forget that the one bouncer the batsman got in that over is purely luck, the bowler could’ve easily finished the over with 6 good length balls. This is the process which involves luck and it is mostly what you see in the markets but your process starts from way back, to play any shot in cricket you need to stand correctly, your head should be on the ball, you need to play close to your body, you need to have clarity whether it’s a horizontal or vertical bat shot, to ingrain all this in your muscle memory is a process in itself, in investing this process is equivalent to reading.After going through the entire process, no matter what the result due to uncertainty and luck eventually if you trust the process you will reap what you sow. Keeping this in mind it’s useless to predict when a certain stock is going to go up and by how much, in contrast if you look at the business it’s fundamentals you might have a fairly decent chance to benefit from the movement, now if you stay vested in the stock for quite some time and the fundamentals stay strong someday or the other when you’re lucky you will find yourself ‘in the right place at right time’. It took the stock of Microsoft almost 13-16 years before there was any movement but the analyst who went through the fundamentals must’ve noticed that EPS kept rising and P/E kept coming down, the business itself became stronger on paper because of the rising earnings and based on that he invested not knowing if this story will continue and also not knowing when the price will reflect it. You can see the chart below

This isn’t just Microsoft we are talking about it’s the story of countless other stocks which you can identify by just employing the right process  

Conclusion

When it comes to results the combination of luck and uncertainty deems us to 4 possible results:

Bad process = Bad outcome (most probable)

Good process = Bad outcome (temporary)

Bad process = Good outcome (temporary)

Good process = Good outcome (most probable)

Usually the process you follow determines the outcome because it tilts those odds into your favour the rest is just luck. So if you want to get things right 6/10 times employing a good process is critical. 

This is the last post for 2023.

Happy new year!