Focus on What is Knowable

Dear Clients and Friends,

I think we can all agree that the future is unknowable.  But like Mark Twain supposedly once quipped, “History doesn’t repeat itself, but it does rhyme”.  What will happen in the future, while certainly unknowable, is often similar to what has happened in the past.  There are certain themes in history that give us a construct to understanding how the future will be shaped and these themes are often heavily influenced by human nature.  So, rather than trying to predict the future, the investor simply tries to understand human nature and the tendencies that human nature brings to the world of investments.

Warren Buffett was once asked a question about focusing on what is important and his answer can give us insight into the dilemma between important and knowable.  He said, “Focus on what’s important and knowable.  There are many things that are important and not knowable, like whether there will be a nuclear attack tomorrow.  You can’t focus on those.”  By focusing on the knowable attributes of the market and of business, one can gain a more lucid decision making skill-set that serves them well when confronted by the volatility that so often accompanies the stock market.

Aristotle once said, “Knowing yourself is the beginning of all wisdom.”  For the investor, knowledge starts with knowing one’s limitations and knowing one’s circle of competence.  The concept of circle of competence has its roots in the life of Andrew Carnegie, who after working for years in the steel industry, made it his business to do nothing but steel.  At this time many business Titans were dabbling in all sorts of industries, Carnegie only sought out investments into steel and left the rest for the Rockefellers, Vanderbilt’s, Mellon’s etc.  As Warren Buffett once wrote, “Know your circle of competence and stick with it.  The size of the circle is not very important; knowing its boundaries, however, is vital.”

The market goes through periods where nothing is ‘knowable’ because everything that happens doesn’t make a lot of sense to the observer.  But it is this knowledge that allows investors to put chaotic markets into proper perspective.  We can test strategies, and gather volumes of data, but when the market does not follow a predictable pattern or falls into panic, all the data is meaningless and the only legitimate strategy is to have faith.  Not knowing the outcome of the markets chaos is normal and should not be over-analyzed.  As Warren Buffett once noted, “Predicting the rain doesn’t count; building Arks does.”  Knowing what can happen is different than having a strategy to deal with what will happen.  We have to be proactive when times are good, always preparing for what chaos the market might bring, and when times are bad, we should rely upon faith, because no one truly knows the future.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All investing involves risks including loss of principal. No strategy assures success or protects against losses.

The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

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