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Not Having An Opinion On Everything: investor's superpower

Not Having An Opinion on Everything: The Investor’s Superpower

If you deal with investments or any financial matters, then it is likely you have a view (or you are expected to have a view) about everything. When will mortgage rates drop? When will inflation peak? Will Apple stock go up or down? Does this fund manager have skill? If we don’t have an opinion then we either lack knowledge or conviction, perhaps both.

There is a stigma attached to saying “I don’t know”, not just in the investment industry but in all areas of life. Nobody wants to sit on the fence or stand in the middle of the road, but for investors this is absolutely the correct place to be most of the time because the world of finance is always full of surprises. Since the future can never be known with certainty it is almost never possible to make accurate predictions. But it’s not our job as investors to have an opinion on everything. In fact, not having an opinion on most things is a big advantage, though it’s hard to use it to your advantage. 

Understanding Our Limits

So why is there an expectation for investors to have views on everything? Because it gives a sense of control. Financial markets are complex, unpredictable and anxiety-inducing; when an investor makes predictions and trades on them it might feel like we’ve got a handle on our investments, rather than our portfolios being a hostage to fortune.

The reality is that most investors don’t have a good sense of scale because they are always making predictions about things they can’t possibly know anything about. This leads to constant trading, which lowers the value of your investment overtime because of the costs associated with all transactions and the losses that come from trying to predict what can’t be predicted.

Realising our own limits as investors and being honest about what we do and don’t know is the basis of any successful investment plan. You can’t be an expert in every market or industry, and it’s important to realise that most short-term market perspectives aren’t within anyone’s circle of competence. But in some markets and fields, it is possible to have credible expertise. 

Instead of trying to predict how the markets will move, you should learn to appreciate and be interested in how complicated they are. You don’t have to take a position or make a trade. Instead of trying to guess how the markets will change, we should learn to focus on the long-term because history tells us the odds are in our favour in having a confident (though not certain) perspective.

The Best Time To Have An Opinion

Investing isn’t about making predictions about the future all the time. Instead, it’s about knowing when to have an opinion and when not to have an opinion. The most important thing for us to do is figure out if it makes sense to have any kind of opinion at all, and if we have a good chance of being right.

For example, if we are asked to predict whether global equities will have positive returns over the next six months, the answer is likely to be a resounding “I don’t know.” Since short-term market movements are often unpredictable and come with a lot of noise, any predictions would be based on a foundation of little trust.

On the other hand, if you ask us to guess whether or not global stocks will give positive returns over the next ten years, we might have an idea. Long-term, the performance of stocks is likely to be driven by the cash flows they generate, and the lessons we can learn from looking back at the past show that we have a good chance of having a positive outlook.

It’s important to be honest about our thoughts and positions only when we have a long-term view and a lot of evidence that shows our view is likely to come true. Then we should say what we really think and where we stand. This happens a lot when market prices have reached their peaks, which is when you should ignore everything else as noise.

The Power of Ignorance Done on Purpose

This outlook might feel uncomfortable because of our human and controlling tendencies, but the fact that we don’t have an investment view on every unknowable in the financial markets shows that we have a better understanding of the world in which we work and live in. 

Even more of a sign of ignorance is thinking that we can accurately predict all kinds of complicated and hard to understand events. It is better to wait for opportunities where the odds of good outcomes are high than to change our views and positions all the time in response to new information. 

In the crazy world of finance, investors can find peace and financial success by following the philosophy of wilful ignorance.

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