135 - Investing in the Face of Uncertainty

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Mental Models discussed in this podcast:

• Second-Order Effects
• Mean Reversion
• Factor Investing

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Show Outline

• Today’s podcast will focus on a single precept: You can’t predict the future
• First and Second Order Effects
  • Margin of Safety
  • Preference for cash now vs cash later (Plays into want for profitable companies) Time value of money. 
  • Growth is important because it can correct for mistakes, but you know you can’t predict it
  • Some of what you “know” about investing may not be true
  • Importance of Zero-Based Thinking (what is the best decision today based on what you know today)
    • Wrong because past price performance can’t predict the future (it may, but it may not)
    • Wrong because it assumes that winners will keep on winning and losers will keep on losing
  • “Don’t catch a falling knife”
  • “Hold onto winners, trim your losers”
  • The central problem with rebalancing
  • It is definitely true that successful rebalancing CAN add value
  • It is also true that it is IMPOSSIBLE to know if your rebalancing will be successful
  • How then do you behave? How do you invest in the face of uncertainty?
• First order:
• Second order:
• Investing in the face of uncertainty
• You cannot assume business momentum. You plan for it and buy stocks you think will have it, but your strategy cannot assume it will continue