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A Few Notes on The Uncertainty Solution

| | Posted in: Big Ideas, Strategic Allocation

In his 2023 book, The Uncertainty Solution: How to Invest with Confidence in the Face of the Unknown, author John Jennings seeks “to provide individual investors with mental models that will help them make better investment decisions, practice better investment behavior, and be better consumers of investment advice… This book is not about how to invest but rather how to think about investing. It is the culmination of my thirteen-year quest for investment wisdom… The mental models in this book describe the investment world as full of uncertainty, wild randomness, unpredictability, and pitfalls. There’s no easy path. But mental models that embrace reality—that take the world as it is, not how we think it is or want it to be—will make you a better investor and a better consumer of investment advice.” Based on his many years of wealth management experience, especially during the 2007-2008 Financial Crisis, he concludes that:

From Chapter 1, “The Quest for Certainty” (Pages 22-23): “Making peace with uncertainty is unbelievably difficult, yet it’s essential to successful investing. Train yourself to notice when you are faced with uncertainty and it’s causing you discomfort. When you can recognize that uncertainty is causing discomfort and you don’t react to it, you’ll make better decisions…”

From Chapter 2, “Looking for Causes in All the Wrong Places” (Page 50): “Any decisions you make that assume causation where it doesn’t exist will likely be poor ones. Because humans have a deep desire to explain, you’ll often see cause where none exists. Knowing when one thing causes another is tricky and is especially difficult when observing highly correlated things because correlation makes it seem as if there’s causation. Determining causation is further complicated because sometimes things occur just because the math says they will, as is the case with regression to the mean and small sample size observations. Finally, the highly improbable is not only probable, it’s inevitable.”

From Chapter 3, “The Stock Market Is Not the Economy” (Pages 62-63): “The fact that the stock market operates as a complex adaptive system is an essential concept… It means that many effects we see in the markets have no readily discernible cause; there’s simply too much complexity generated between the various agents that interact and create feedback loops… Thinking of the stock market as a complex adaptive system allows us to understand why economic and market indicators don’t predict stock market returns. If there was a signal that investors knew could predict future market movements, they would change their behavior.”

From Chapter 4, “Market Cycles and the Two Axioms of Investing” (Page 86): “While the market indisputably moves in cycles, it’s impossible to consistently time market cycles profitably. Understanding these two opposing axioms of investing gives you the freedom to shut out most of the market’s noise and focus on your behavior. Instead of trying to guess what the economy or stock market is going to do, resist the greed—or irrational enthusiasm—that accompanies booms, as well as the panic that comes with busts. Keep calm, carry on, and avoid the urge to tinker with your portfolio.”

From Chapter 5, “Beware Experts Bearing Predictions” (Page 107): “Forget about trying to sift through the torrent of daily financial information. Don’t try to find some mythical investment guru who can see around corners and predict the future. Instead, look for help from an experienced (and humble) guide who can explain the myriad types of investments and advise you on portfolio construction and their tax implications. That’s essential, that’s useful, and it’s a whole lot better than depending on someone who claims to have an infallible crystal ball in their closet.”

From Chapter 6, “Skill and Luck in Investing” (Pages 134-135): “Luck plays a big role in investing, so we shouldn’t read too much into good or bad results over short periods…  Most active managers underperform after fees…be aware that the odds are against them outperforming… Most stocks underperform the market. Realize when you buy an individual stock that the odds are stacked against you… Beating the market requires investing differently than the market, which requires great heart and discipline. If you choose to break off from the herd, it’s essential to stick with your strategy through the inevitable ups and downs.”

From Chapter 7, “The Trend Is Not Your Friend” (Page 166): “It’s hard to spot trends early, partially due to the challenges of comprehending the nature of exponential growth. Established trends can change course rapidly as new competitors and technologies upend trends… It’s hard to pick winners. As new technologies create new industries, many companies enter, and most fail. Early pioneers usually aren’t the long-term winners. Instead, fast followers often are the most successful.”

From Chapter 8, “The Trivial Many Versus the Vital Few” (Pages 191-192): “The bell curve is a useful statistical tool in many areas of life, but it’s misapplied in the investment arena. It wrongly sets the expectation of mild randomness, when we should be prepared for wild randomness… Embrace the uncertainty inherent in the markets; prepare for gigantic swings that could (and will) be just around the corner… Maintain an adequate margin of safety to ride out extreme downside events.”

From Chapter 9, “Navigating Our Behavioral Biases” (Page 218): “We all tend to ascribe behavioral biases to other people (an example of our overconfidence bias), and we think that we’ll be able to avoid those biases if we just learn about them. Unfortunately, that’s not the case. These deeply ingrained biases have developed over hundreds of thousands of years of evolution, and we can’t easily set them aside… There are processes and strategies that we all can put in place that will help us make better decisions without being overly influenced by biases.”

From Chapter 10, “Behavior—The Most Important Ingredient” (Pages 240-241): “Here are eight best practices that will help you exercise optimal investment behavior:

1. Choose inactivity over activity.
2. Prefer simplicity over complexity.
3. Create an investment policy statement [simple rules of asset allocation and rebalancing].
4. Build a margin of safety into your portfolio.
5. Focus on the long term.
6. Don’t look at your portfolio.
7. Have a ‘play'” account.
8. Find the right advisor.”

From the Conclusion (Page 245): “Instead of searching in vain for certainty in a world and a market that does not and will never contain it, we’re better off accepting things as they are and paying attention to what we can control: our own behavior.”

In summary, individual investors will likely benefit from The Uncertainty Solution as a thoughtful/humble compendium of long-term investing lessons learned from an experienced wealth manager as an antidote to market obsession.

Cautions regarding conclusions include:

  • The book does not offer specific strategic or tactical asset allocation recommendations.
  • The content is more about constant reminders than fascinating original ideas.
  • Wealth managers/advisors may tend to produce such books when their preferred investment approach is working well.

See also complementary contributions from Emanuel Derman.

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