Investing in a complex and uncertain world

Feel free to reach out to PSG Wealth Manager Dawie Klopper directly.

The world can sometimes change very quickly. Covid broke out almost overnight, there is the ongoing Israel/Hamas war, and do not forget too soon about the great 2008 recession. Events like these create uncertainty and make people afraid, anxious, and cautious.

So, what can investors do in these circumstances? How do we plan for the future amid so much uncertainty?

Morgan Housel and Annie Duke, author of the book Quit: The Power of Knowing When to Walk Away, said in a speech at the CFA Institute’s 73rd Annual Virtual Congress that three things will help you manoeuvre in an uncertain environment: data, happiness, and humility.

By gathering a lot of information about the scenario in which you have to make decisions you might just be able to make good decisions. However, you may also reach a point where you have gathered too much information, almost overwhelming you. Complexity just gets too much, and your mind can‘t process everything.

But, if we are to believe the claims of experts in the artificial intelligence (AI) environment, AI is going to help you make decisions.

Really? In scenario planning, the scenarios must be created and the model built within which the decision will be made. Just think of a macroeconomic model where economic growth is calculated for budgetary purposes. Everything is in place, and then suddenly Covid breaks out. All of a sudden, your framework is no longer useful because no one has foreseen a pandemic where the world shuts down for five weeks.

Does anyone really know what will happen next, or is not luck on your side when you seem to get things right?

Sometimes you can be absolutely sure of your case. But in the back of your mind, you know there is a chance that you could be wrong. In the past, I have referred to the real estate bubble experienced from 2006 to 2008, when no one could go wrong with a real estate investment. You could simply borrow money, buy a few properties, and sell three of the four properties within a year, and the fourth one would have been paid off, as it were. Yes, it was that easy... but that alone should have set off some warning lights.

When your confidence is so high, you do not listen to advice. You would only do one more round of such speculative investing. And then the unexpected happens. The 2008 financial crisis arose almost overnight. Lehman Brothers, which at the time was a 200-year-old investment bank, went bankrupt over a weekend and suddenly no one could get a property sold. The ‘smart investor’ then sat with four apartments and a lot of debt, and no tenants – wiping out all the profits made in the previous three years within a noticeably short time.

So, you also have to guard against excessive self-confidence. An extremely key component of a successful investment strategy is humility. Many times, it is not you who are so good, because you just happened to have chosen the right company to invest in, which is about to be taken over at a much higher price just after you have made the investment. Bragging about your cleverness (or was it luck?) is just a recipe for another failure. Rather admit that you do not know everything, after all, that is why diversifying your investments makes so much sense.

So, collect a lot of data, admit that sometimes you are lucky when you make your decisions, and stay humble. But also remember what Gary Player said: the more you practise and prepare, the luckier you become.