I read the following in Howard Marks’s latest book (p. 138):
“Since the investors of the ‘I Know’ school, described in chapter 14, feel it’s possible to know the future, they decide what it will look like, build portfolios designed to maximize returns under that one scenario, and largely disregard the other possibilities. The suboptimizers of the ‘I don’t know’ school, on the other hand, put their emphasis on constructing portfolios that will do well in the scenarios they consider likely and not too poorly in the rest.
Investors who belong to the ‘I know’ school predict how the dice will come up, attribute their successes to their astute sense of the future, and blame bad luck when things don’t go their way. When they’re right, the question that has to be asked is ‘Could they really have seen the future or couldn’t they?’ Because their approach is probabilistic, investors of the ‘I don’t know’ school understand that the outcome is largely up to the gods, and thus that the credit or blame accorded the investors—especially in the short run—should be appropriately limited.
The ‘I know’ school quickly and confidently divides its members into winners and losers based on the first roll or two of the dice. Investors of the ‘I don’t know’ school understand that their skill should be judged over a large number of rolls, not just one (and that rolls can be few and far between). Thus they accept that their cautious, suboptimizing approach may produce undistinguished results for a while, but they’re confident that if they’re superior investors, that will be apparent in the long run.”
Marks opened his Chapter 14 with three great quotes, one of which I use all of the time:
We have two classes of forecasters: Those who don’t know–and those who don’t know they don’t know. –John Kenneth Galbraith
He closed the chapter with a quote that I will have to start using often:
It ain’t what you don’t know that gets you in trouble. It’s what you know for sure that just ain’t so.”–Mark Twain
As Marks said, “…investing as if you know what’s coming is close to nuts.”
Are you prepared to pick off bargains, or are you one of the people in the “I know” school who was fully invested on July 7 and selling indiscriminately today? Can you trust your contrarian instincts when those instincts are supported by hard, knowable data, or will you follow the herd and the prognosticators? Which way you answer often accounts for the difference between investment success and failure.