We Never Can Be Fully Sure
Doubt is not a pleasant condition, but certainty is absurd.
—Voltaire
The quality of our lives is the sum of decision quality plus luck. We look to learn from the results of our decisions to improve. Our lives, however, are too short to collect enough data from our experiences to evaluate the quality of our decisions from the small set of results we experience.
We can only do so much to answer questions on our own. We are only exposed to the information we encounter, only live the experiences limited to our personal lives, and only think of the hypothesis that we can conceive of. As a result, it can be hard to know what reasons someone else could have for believing something different. The best cure for overconfidence in your beliefs is to constantly remind yourself that you have experienced less than a tiny fraction of a percent of what has happened in the world. This experience, however, ends up representing nearly 100 percent of how you believe the world works. People tend to believe in what they have personally seen, far more than what they read has happened to others. We are all biased by our personal history. Our installed beliefs are the result of our personal experiences in the past, and they shape our visual prism. If you have lived through hyperinflation or a severe bear market or were born in a poor family or have been discriminated against, you already believe in something that people who have not experienced those things never will. You likely also grossly overestimate the chance of those events happening again. Morgan Housel offers a helpful suggestion to help us better empathize: “Start with the assumption that everyone is innocently out of touch and you’ll be more likely to explore what’s going on through multiple points of view, instead of cramming what’s going on into the framework of your own experiences. It’s hard to do. It’s uncomfortable when you do. But it’s the only way to get closer to figuring out why people behave like they do.”1
Becoming Rich Versus Staying Rich
Many people achieve success, but to sustain the same (and potentially build on it) over an entire lifetime requires humility, gratitude, and a constant learning mind-set. Becoming rich often becomes the biggest obstacle to staying rich. Winning big makes many of us feel invincible, and that feeling entices us to bet big on what worked for us in the recent past. This ends up creating a catastrophic event when the world changes or luck turns against us. Housel writes:
It goes like this. The more successful you are at something, the more convinced you become that you’re doing it right. The more convinced you are that you’re doing it right, the less open you are to change. The less open you are to change, the more likely you are to tripping in a world that changes all the time.
There are a million ways to get rich. But there’s only one way to stay rich: Humility, often to the point of paranoia. The irony is that few things squash humility like getting rich in the first place.
It’s why the composition of Dow Jones companies changes so much over time, and why the Forbes list of billionaires has 60 percent turnover per decade….
Humility doesn’t mean taking fewer risks. Sequoia takes as big of risks today as it did 30 years ago. But it’s taken risks in new industries, with new approaches, and new partners, cognizant that what worked yesterday isn’t what will work tomorrow.2
Absolute certainty never exists in the world of finance. Yet, on Wall Street, overconfidence is all-pervasive. Jason Zweig highlights the hubris of investors in his definitions of certainty and uncertainty in his book The Devil’s Financial Dictionary:
CERTAINTY. An imaginary state of clarity and predictability in economic and geopolitical affairs that all investors say is indispensable—even though it doesn’t exist, never has, and never will. The most fundamental attribute of financial markets is uncertainty.
UNCERTAINTY. The most fundamental fact about human life and economic activity. In the real world, uncertainty is ubiquitous; on Wall Street, it is nonexistent.3
Contrast the kind of egotism found on Wall Street with the humility of one of the greatest minds outside of finance, Richard Feynman. We should all learn from this great teacher, who humbly admits that nothing is ever certain: “We know that all our statements are approximate statements with different degrees of certainty; that when a statement is made, the question is not whether it is true or false but rather how likely it is to be true or false.”4
Investing is no different. Approximate statements and different degrees of certainty require us to think probabilistically. The question is not “Will I be right or will I be wrong?” The question should be “What is the probability of this scenario versus another, and how does this information affect my assessment of value?” We must always leave room for doubt, even in those ideas that hold our highest conviction. Otherwise, we risk becoming complacent.
An attitude of knowing everything makes it difficult to learn anything. According to Feynman, before you begin any task, you first must not know the answer. We must begin by being uncertain about the answer. Otherwise, how can we learn? This may sound like common sense, but it is not so common in the world of finance.
Acknowledging that we do not know something is much more beneficial than having the incorrect answers. If we can be certain of one thing, it is that we can never be fully sure. We must learn to live with doubt and embrace uncertainty. We shouldn’t feel anxious about not knowing things. Rather, we should welcome it. Because the realization of not knowing something is an opportunity to learn. In science, “I don’t know” is not an indication of a failure but rather is a necessary first step toward enlightenment. As Feynman puts it,
The question of doubt and uncertainty is what is necessary to begin; for if you already know the answer there is no need to gather any evidence about it.
I have approximate answers and possible beliefs and different degrees of certainty about different things, but I’m not absolutely sure of anything and there are many things I don’t know anything about.
The first source of difficulty is that it is imperative in science to doubt; it is absolutely necessary, for progress in science, to have uncertainty as a fundamental part of your inner nature. To make progress in understanding, we must remain modest and allow that we do not know. Nothing is certain or proved beyond all doubt. You investigate for curiosity, because it is unknown, not because you know the answer. And as you develop more information in the sciences, it is not that you are finding out the truth, but that you are finding out that this or that is more or less likely.
There are few absolute truths in investing. The best we can do is gather evidence as diligently as possible to assess the likelihood of various outcomes. We do this by connecting various pieces of the puzzle and trying to put them together in a way that makes sense. We are constantly exploring. We are constantly looking for new evidence—trying to find out more about what we know and to better understand what we don’t know.
After we gather the evidence, we must study the same. What did we learn? What does that imply for our original hypothesis? How likely is it that we are correct? Are there other factors we failed to consider that may have led to different results or conclusions? Investors are often too anxious to jump to conclusions that support their original thinking. Confirmation bias is difficult to resist. Again, we should learn from Feynman:
If we investigate further, we find that the statements of science are not of what is true and what is not true, but statements of what is known to different degrees of certainty: “It is very much more likely that so and so is true than that it is not true”; or “such and such is almost certain but there is still a little bit of doubt”; or, at the other extreme, “well, we really don’t know.” Every one of the concepts of science is on a scale graduated somewhere between, but at neither end of, absolute falsity or absolute truth. It is of great value to acknowledge ignorance.
Investors have a difficult time acknowledging the presence of uncertainty.