Last Updated June 15, 2015
Uncertainty is something that investors must learn to live with if they are ever to be successful. In fact, they should do more than just learn to live with it, they should positively take advantage of it.
Imagine you’re the captain of an ocean liner. You’re sailing across a huge ocean and the journey will take many years, perhaps decades. On board you have many passengers who are dependent on your skill as captain to see them through the journey both safely and in good time.
Imagine also that there is a constant fog. No matter how clear the weather, no matter how calm and sunny the day, the fog obscures your view of what lies ahead. You can see no more than a hundred yards which is barely enough to slow or change direction for an ocean liner.
Now imagine that there are many other ships headed in the same direction. Each is captained, not by a private investor like yourself, but by a professional fund manager. Passengers would like to get to their destination as quickly as possible and they can teleport from one ship to another at the press of a button. Each captain gets a fee for every passenger on board their vessel.
How does this story pan out?
If the weather is good and calm then after a while one captain may increase his ship’s speed to take advantage. If the good weather continues, this captain will start to pull ahead of the others.
Passengers on these other ships will eventually notice that they are lagging behind. Some of them teleport to the leading ship, increasing that captain’s income as they do. The other captains begin to realise that they’re losing passengers and losing fees. There is only one thing they can do to save their fees (and their jobs), and that is to chase after the leading ship, going full throttle into the fog, with caution thrown to the wind.
Eventually all of the ships captained by professional fund managers are going full tilt into the fog. The seas are calm, the ships are steady, and the passengers are most pleased with their rapid rate of progress.
You on the other hand, have no desire to fill your ship with more passengers. Your ship is already filled with your financial dependents (including yourself of course), and if they ask you why you’re going slowly relative to the other ships, you remind them that this is just the calm before the storm.
Eventually of course, there is a storm.
Some of the ships that were ploughing ahead at full steam are sunk, while others are badly damaged. All are shocked and shaken, and say that “nobody could have seen the storm coming”. Being wise to the ways of the sea you know better.
As the storm continues, the other captains become frozen with fear, afraid to go forward at anything more than a snail’s pace. They thought the cycle of calm and storm had finally been banished through the clever use of complex mathematical models; but they were wrong.
As they struggle to cope with this new and more volatile environment, you simply carry on as before, cautiously maintaining a wide margin of safety between what your ship is ultimately capable of and what you ask of it.
In the end you remain calm, drive cautiously through the storm, and eventually come out far ahead.
A stoic outlook and a wide margin of safety will always be the hallmarks of a good long-term investor, because the fog of investing will never clear, and you can never know what lies just a short distance ahead.