Blog - January 18, 2021
Every year as we flip the calendar, we reflect on the past year and look forward to the one ahead. There’s a lot to digest from the last 12 months but, more practically, there are some lessons to be learned. Challenging and trying experiences tend to have more to teach us than simpler times, so there’s a boatload of learning to absorb this year.
In January of 2020, experts, pseudo-experts, and random people with opinions made many predictions and outlined expectations. Their predictions came armed with information to support their view of the future, and more importantly, they came with a narrative that wove a compelling story. For many people this kind of thing is very appealing, after all, we’re programmed this way; since the dawn of time, humans have looked for patterns to predict the future and taken great comfort in the exercise.
In January of 2020, nobody saw what was coming. It didn’t fit into any pattern and wasn’t on anyone’s bingo card. Even if someone had accurately predicted 2020, nobody would have accepted it as possible; it would have sounded more like science fiction. Herein lay the two big lessons we keep relearning.
The first lesson is that predicting the future is largely for entertainment purposes, and one should never make decisions based on a guess, no matter how detailed. If you use short-term predictions as a basis for decision making, you will act with more confidence than you should. Take the example of a farmer who reads in the almanac that it will be a dry summer. If he uses this to plan for a dry summer with no consideration for the possibility that it may not be dry, he could be setting himself up for failure. Instead, he could secure access to more water for irrigation in case he needed it, and stop short of changing his crop to one that requires dry conditions to flourish because that would be a step too far and would be disastrous if those dry conditions failed to materialize.
The second lesson is to stop being confident about what comes next. We live on a rock hurtling through space at 1,700 km per hour. Stuff happens! Most scientific discoveries in the lab don’t come with a “Eureka” moment; it’s more likely they’re accompanied by a puzzled, “Huh, that’s odd.” The idea that we could possibly know for certain how one new technology or the other will revolutionize the world is more than a little cocky. It’s perfectly reasonable to expect there could be other considerable advances in technology based on what we’ve experienced this year, but to invest in one company or industry based on this “sure thing” is just not smart.
Now we come full circle to investing your wealth.
Risk is a word that gets thrown around a lot, and it means different things to different people. Arguably the worst form of risk is the permanent destruction of capital; your money goes to zero and doesn’t come back. Recent examples of this would include some cannabis companies, hospitability businesses, and commercial real estate offerings. Overconfidence in these businesses and “narratives” could have cost you. With a properly diversified portfolio – one that accounts for many possible eventualities – the probability of your wealth being permanently eroded is significantly reduced.
We believe that the global economy will grow over time. It has survived nuclear bombs, world wars, famines, a couple of pandemics and endless geopolitical stress. The key to accomplishing your goals is thoughtful diversification and a humble approach that includes a healthy dose of “What if I’m wrong?”
This isn’t elegant or comfortable and doesn’t offer a short cut, but it will set an expectation you can count on.
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