Knowing what you don’t know

Barry Ritholtz does a great job at explaining the significance of acknowledging what we don’t know.  He quotes a respected, sophisticated investor who states, “I don’t know how the market will perform next year. I don’t know if stocks will be higher or lower in five years. Indeed, even though the probabilities favor a positive outcome, I don’t know if stocks will be higher in 10 years.”

It’s not just that some people don’t know these things.  They are, in fact, unknowable.  While many pundits love to give their opinions, no one can predict the unpredictable.

Once you accept this reality, your approach to investing should change significantly.

Redirecting your efforts

Investors waste enormous amounts of time trying to find patterns where none exist; attempting to pick stock “winners’ or identifying the next “hot” active managed fund manager.

These activities are not just counter-productive.  They are an enormous waste of time.

The massive inflows into index funds and passively managed funds, and outflows from actively managed funds reflect this reality.  Investors – it seems – are starting to understand what they don’t know. (more…)