Investing in Uncertain Times

It is almost always more profitable to invest in uncertain times compared to when everything seems certain.

Investors, like most people, don’t like doubts and uncertainties. I have friends who have to plan out every step in their daily lives and goes into panic mode whenever something unforeseen happens.

Of course, the best is to avoid entirely what you can’t control and evaluate. As such, successful investing is largely about looking for opportunities through the uncertainties.

If you need reassurance, you’re most likely be on the losing end. Like high fees to “experts” who would predict the future (which you falsely believe as reassurance, which it isn’t), or following gurus or analyst reports with no due diligence conducted on your own (not understanding the fundamentals and panic sell when prices fall).

On the other hand, if you can get in the habit of seeking out uncertainty, you would have developed a great instinct. In addition, it’s highly profitable in the long term.

Mohnish Pabrai wrote in his brilliant book The Dhandho Investor –

Wall Street sometimes gets confused between risk and uncertainty, and you can profit handsomely from that confusion. The Street just hates uncertainty, and it demonstrates that hate by collapsing the quoted stock price of the underlying business. Here are a few scenarios that are likely to lead to a depressed stock price:

High risk, low uncertainty
High risk, high uncertainty
Low risk, high uncertainty

The fourth logical combination, low risk and low uncertainty, is loved by Wall Street, and stock prices of these securities sport some of the highest trading multiples. Avoid investing in these businesses. Of the three, the only one of interest to us connoisseurs of the fine art of Dhandho is the low-risk, high-uncertainty combination, which gives us our most sought after coin-toss odds. Heads, I win; tails, I don’t lose much!

While value investors are typically low risk investors and stay far away from high risk stocks, that’s more a reflection of the price they’re willing to pay for any given investment than the types of situations they most often pursue, which are often fraught with uncertainty. This means they would price in a greater margin of safety if the risk of the investment is higher and not because they are stingy and afraid of uncertainty.

As businesses constantly evolve and change in response to challenges and opportunities, the lack of clarity around those changes. The risks inherent in the potential outcomes can cause share prices to diverge widely from underlying business values.

The ability to recognize and capitalize upon that dynamic, and understand whether it’s temporary or permanent, is a key element of what sets the best investors apart.

Easier said than done, but this is how we all should be investing in such uncertain times.


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