The world of investing is, by its very nature, a realm of uncertainty. No matter how sophisticated our tools, how robust our strategies, or how informed our decisions, the future remains fundamentally unknowable. Yet, paradoxically, it is within this uncertainty that great opportunities lie. The art and science of investing hinge not on eliminating uncertainty but on learning to embrace it.
To understand why uncertainty is a constant companion to investors, we must first define it. Unlike risk, which can be measured and quantified, uncertainty represents the realm of the unknown. It is the unpredictable outcome of countless variables, from geopolitical events to technological breakthroughs, that shape markets in ways no model or forecast can fully capture.
Historical Lessons in Uncertainty
Consider the financial crises that have punctuated market history. The Great Depression of the 1930s, the dot-com bubble of the late 1990s, the 2008 global financial crisis, and the COVID-19 pandemic were all marked by events few foresaw with precision. Each episode brought a wave of uncertainty that upended conventional wisdom and tested even the most seasoned investors.
In the UK, the financial crash of 2008 serves as a vivid reminder. The collapse of Northern Rock, followed by the government bailouts of Lloyds Banking Group and the Royal Bank of Scotland, illustrated how systemic risks could materialise seemingly overnight. These moments of turmoil illustrate a vital truth: uncertainty is not an anomaly but an integral feature of markets. Attempting to predict or outmanoeuvre it often leads to frustration and suboptimal outcomes. Instead, successful investors focus on resilience, adaptability, and an acceptance of uncertainty as part of the journey.
The Limits of Forecasting
While financial analysts and economists provide projections, their accuracy is frequently limited. A 2013 study by Philip Tetlock, author of Superforecasting, revealed that even experts’ predictions are often no better than chance. This does not mean forecasting has no value, but it underscores the importance of humility in interpreting such predictions.
As human beings, we are wired to seek patterns and predict outcomes. This instinct has served us well in many areas of life but becomes a liability in the unpredictable world of investing. The financial markets are influenced by myriad factors including macroeconomic indicators, corporate earnings, investor sentiment, and political developments which all interact in complex and often non-linear ways.
A Personal Example of Forecasting Fallibility
Only this month, I saw the truth of this myself, with a long-term holding in Digital 9 Infrastructure Trust falling 25% on the news that an asset sale had to be discounted at nearly 40% to the latest net asset value in order to attract successful interest. At the last trading update, the company had the asset booked at $283m, which, after the discount, was sold for $75m. Arguably, this was a more certain outcome than some, with the company having already lost 90% of its value from all-time highs. Yet one commentator had the asset valued at $1.6bn—more than seven times what was actually realised.
This leads me to my next point—the danger of overconfidence, which is a huge pitfall in investing. When investors believe they can predict market movements or identify the “next big thing,” they often take excessive risks. This behaviour is exacerbated during bull markets when rising prices create an illusion of certainty. The subsequent corrections serve as painful reminders of the market’s unpredictable nature.
The Benefits of Embracing Uncertainty
Rather than fearing uncertainty, investors can derive significant advantages by accepting it. This shift in mindset enables a focus on what can be controlled and a willingness to adapt to changing circumstances.
- A Long-Term Perspective – In my opinion, one of the most effective antidotes to uncertainty is a long-term investment horizon. Over extended periods, markets have demonstrated a remarkable ability to recover from downturns and deliver growth. In the UK, the FTSE All-Share Index has provided steady returns despite challenges such as Brexit and the pandemic. By focusing on the long term, investors can ride out short-term volatility and benefit from the compounding of returns. This requires patience and a disciplined approach to avoid reacting impulsively to market fluctuations.
- Diversification – Diversification is a cornerstone of risk management and an effective strategy for navigating uncertainty. By spreading investments across asset classes, sectors, and geographies, I aim to reduce the impact of adverse events on my portfolio. While diversification does not eliminate losses, it mitigates their severity and enhances the likelihood of positive outcomes. For example, due to diversification and position sizing, the latest fall in Digital 9 Infrastructure Trust cost me a little over 0.1% of my total portfolio, with my overall portfolio actually ending the day up 1%. Similarly, a well-diversified portfolio containing UK gilts, blue-chip equities, and property investments can cushion the blow during turbulent times.
- Flexibility and Adaptability – The ability to adapt to changing conditions is a hallmark of successful investors. This does not mean abandoning a well-considered strategy at the first sign of trouble but rather being open to recalibration when circumstances warrant it. For instance, shifts in economic policy or technological innovation may necessitate adjustments to asset allocation or investment focus. Continuing with our example of Digital 9 Infrastructure Trust, I realised a long time ago that management was entirely untrustworthy and as such decided that I would give them no further capital. The situation had fundamentally changed from when I made my initial investment, and so the decision then became a question of how to maximise the return of as much of my original investment as possible in as short a time as possible. Some other investors took the decision to liquidate their holdings, but I felt that more value could be realised by waiting for a wind-down of the company. To date, this has proved the incorrect assessment.
- Emotional Discipline – Uncertainty often triggers fear and anxiety, leading to poor decision-making. Emotional discipline – the capacity to remain calm and rational in the face of volatility – is critical. This involves resisting the urge to sell in panic during market downturns or chase speculative gains during bubbles. Many of the investors I speak to have fundamentally emotional reactions to investment outcomes, both positive and negative, which weaken their rational decision-making ability.
Strategies for Navigating Uncertainty
While uncertainty cannot be eliminated, investors can employ strategies to manage its impact and position themselves for success.
Focus on Fundamentals – Focusing on the fundamentals of an investment is, in my opinion, absolutely critical. Amid the noise of market speculation, the foundational principles of investing remain unchanged. Companies with strong financials, competitive advantages, and sustainable growth prospects are more likely to weather periods of uncertainty. Conducting thorough research and due diligence helps identify such opportunities.
Build an Emergency Fund – Building an emergency fund has played a large part in steadying me emotionally when investing. If my entire life savings hinged on the performance of a single investment, the pressure would be indescribable. An emergency fund provides a financial safety net, reducing the need to liquidate investments during market downturns, and provides me with the confidence to stay the course and avoid locking in losses.
Rebalance Regularly – Market fluctuations can cause your portfolio to drift from my intended allocation. Although I am not an advocate of constant ‘tinkering’ with a portfolio, a regular check of what I own helps me to maintain risk exposure with my long-term goals and tolerance. This disciplined approach also encourages me to buy assets when cheap and sell when expensive.
Conclusion: A Mindset for the Future
Ultimately, uncertainty drives innovation and progress through a desire to reduce it. Technological advancements, new industries, and transformative ideas emerge from the unpredictable interplay of human ingenuity and market forces. Investors who embrace this dynamism position themselves to benefit from the growth it generates.
At the beginning of this article, I suggested that uncertainty is not merely a challenge to be endured but that it is also a source of opportunity. Market dislocations often create openings for investors with the foresight and courage to act. Warren Buffett’s famous adage, “Be fearful when others are greedy, and greedy when others are fearful,” highlights the potential rewards of contrarian thinking during periods of uncertainty.
In the final analysis, uncertainty is an inescapable part of investing. Rather than attempting to conquer or eliminate it, successful investors learn to coexist with it. They focus on the elements within their control, maintain a long-term perspective, and cultivate the emotional resilience needed to navigate turbulent times.
By embracing uncertainty, investors not only enhance their ability to weather the storms of the market but also unlock the potential for growth and prosperity. It is in accepting what we cannot know that we gain clarity on what truly matters.