Voltaire
““Doubt is not a pleasant condition, but certainty is absurd.””
The French writer and philosopher Voltaire is best known for being a voice of reason, rational thinking, and intellectual freedom in an era ripe with doctrine. He knew that uncertainty could cause anxiety. Today, we feel these stressors when uncertainty imposes itself upon critical issues like health, family, or finances. Given the outright fright that comes from this malaise, it is not surprising that investors try to avoid or reduce financial risk. The issue, however, is that there are so many kinds of risks, and it is impossible to eliminate them all. Investors should understand that promising opportunities are often found where risk is believed to be the greatest.
When investors focus on only one risk factor, they become susceptible to poor decision-making. Consider the September 11th terrorist attack, when many investors focused almost entirely on the risk of more terrorism while disregarding other factors. This instinct, this recency bias—to let the last archenemy dominate big decisions—should be carefully avoided or at least recognized and managed. It’s important to always consider the risk and reward tradeoff with any specific investment or investment strategy because each has multiple inherent risks or downsides.
For example, investors concerned about the impact of falling interest rates can reduce the reinvestment risk by buying long-term bonds. However, this strategy exposes the investor to the risk that inflation and interest rates increase while their income does not. Given the numerous risks with fixed income investments, stocks might be a better choice, given that dividends on blue chip stocks are rarely cut and increased at an annual rate of 5% during the second half of the 20th century. That said, stocks expose investors to an unquantifiable number of other risks that can result in a loss, including but not limited to macroeconomic factors, political strife, and company-specific issues. I am sure you all have heard of Enron, for example.
Since bonds and stocks are inherently risky, real estate might be the answer. But real estate prices are affected by variables that are often impossible to predict, such as interest rates, economic conditions, supply and demand, tax rates, local politics/zoning, etc. Are commodities such as gold or oil any better? Civilizations have traditionally prized gold for thousands of years. That said, there have also been waves of highs and lows in these assets. Lastly, some investors may have thought in November 2021 that Bitcoin was a fairly priced “good bet”, only to endure much pain thereafter.
Where does this leave us? The answer is not to discount different investment options but to emphasize that each can disappoint our best of intentions. An asset’s real risk is often greatest when its perceived risk is lowest. This is because an asset’s value or price is usually highest when investors see minimal risk in owning it. Looking back, investors in 1999 generalized that large capitalization technology and internet stocks had little risk and a lot of potential. In retrospect, those risks were high. Conversely, commodities and real estate perceived as having high risk and little value potential went on to perform nicely.
Voltaire tells us to be discriminating in our questioning, to weigh certainty against doubt, and to maintain as much objectivity as we can. Staying focused on facts and results and not what people are saying when it comes to investing. He encourages us never to become persistent in our complacency.
“No problem can withstand the assault of sustained thinking,” he said. Keeping his wisdom in mind, investors should be more contemplative in choices now and in the future.
The history of the market is well-known for its waves from high perceived risk and low prices, to low perceived risk and high prices. Investors who take advantage of these cycles will likely outperform investors overwhelmed by the perceived “risk of the day.” The biggest takeaway is to think back to Voltaire and remember that just as certainty does not exist in life, it does not exist in the financial markets. Opportunity, however, does exist, and it is often found in unpopular places. May investors be cognizant of the paradox of confidence that has stood the test of time. It is possible to have too much of a good thing, so remain balanced and worry just enough to skirt away from overconfidence. Yes, it can be healthy to always worry, to always doubt.
Links to Further Reading:
“The Paradox of Confidence” by James Elfer (January 2019): https://www.morethannow.co.uk/single-post/2019/1/7/confidence
