The uncertainty in investment

I have mentioned in many places that one of the tips for investing is to increase the probability of things happening. In other words, it can also increase the self-confidence of holding shares, which can increase the probability of investment success.

There are two types of uncertainty

Professor Naish from the University of Chicago said that there are two types of uncertainty:

  • The measurable probability is called risk. Risk can be determined by probability and expressed in numbers.
  • The fuzzy state that cannot be quantified is the real uncertainty.

Buffett’s view

Buffett said that when conducting investment research and making reasonable inferences based on various facts, what we have to grasp is “something is certain to happen, but we can’t be sure when it will happen.” In vernacular, it means; what investors should do. The homework is based on various facts, just infer that the stock price is lower than the intrinsic value. Sooner or later, the stock price will reflect the expected price level. As for when it will rise to a reasonable price, it is not something anyone can do. Investors must not believe that anyone tells you that he can predict the exact time of occurrence. Please always remember the investment guru Bernard Baruch’s words, “Don’t try to buy at the bottom and sell at the top. This can’t be done – except by liars.”

Buffett likes “buying uncertainty.” Buffett said: “Calculations of intrinsic value, though all-important, are necessarily imprecise and often seriously wrong. The more uncertain the future of a business, the more possibility there is that the calculation will be wildly off-base.” In this case, of course, the spread will be larger and the profit will be more substantial. If the mathematical calculations required to evaluate equities are not difficult, Buffet still said that experienced and intelligent analysts can “easily go wrong in estimating future ‘coupons.’”

Benjamin Graham:”Mathematics is ordinarily considered as producing precise and dependable results; but in the stock market the more elaborate and abstruse the mathematics the more uncertain and speculative are the conclusions we draw therefrom.”

Keynes view

Keynes stated that “if investment is an art, then the art of investing is to use common misconceptions.” He said in his book “General Theory of Employment, Interest and Currency” that investment “Has no scientific basis, so it is impossible to calculate the rate.” General theory evaluates securities “using utilitarianism to calculate the strengths and weaknesses of expectations, multiplying each by an appropriate probability, and finally adding up the expected number of rewards.” But in the real world, it’s actually mostly “We just don’t know.”

Keynes believes that there is no need to be overly precise in the stock market. The reason is simple: “We simply don’t know.” Another his saying by Buffett is “It is better to be roughly correct than to be precise.” That’s why he said, “One good share is safer than ten bad ones.”

Margin of safety

At this time, it’s time for the “margin of safety” to appear. When I discussed the margin of safety in section 5-2 of my book “The Rules of Super Growth Stocks Investing”, I pointed out that the margin of safety can play three major roles. One of them is to “offset judgment mistake”. This is very important, because any transaction that is forced to buy, does not consider the price of the stock, only knows the price but has no value; most of the final results will make investors regret it. But as investors, we still have a way to mitigate these risks – that is, to increase the margin of safety when buying. If you are less sure about the future, that is, the greater the “uncertainty” of your investment, the greater the margin of safety you need.

I mentioned in sections 1-2 of my book “The Rules of Super Growth Stocks Investing” Buffett believes that “Investing is the art, essentially, of laying out cash now to get a whole lot more cash later on, and something at some point better deliver cash.” He knows that it is impossible to obtain the true value of stocks with precise quantification or scientific calculations. But investors can still use non-quantitative methods to increase the reliability of investment; one of the techniques is to increase the margin of safety when buying stocks to compensate for the lack of accuracy in evaluating the company’s stock prices. This is the reason.

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