Research, Views & Articles
Why Not Knowing Can Help You Become Better At Investing

People like to know “things”. More specifically, people like to be seen as “knowing things”. The more knowledgeable, the better.
It’s even become a point of pride and a yardstick for measurement in society, where people who are deemed to be “intelligent”, or “smart”, are held up to have the highest chances of success (in this case, success is almost always narrowly defined as making a lot of money).
It is almost as if a cult has sprung up around the acquisition of knowledge, with the central creed being: Knowing More Things = More Certainty.
Unfortunately, as older and wiser folk among us can attest, the opposite tends to be true: Knowing More Things = Less Certainty, and learning is a process of removing certainty, not one of gaining it.
It is this Less Certainty that helps one appreciate just how little one knows, which, if you think about it, isn’t as paradoxical as it sounds.
The process of learning is, at its core, about assimilating knowledge acquired from different sources to execute actions or explain phenomena that occur in our lives. By definition, when we learn something new about a subject we are already familiar with, older knowledge is updated, corrected, or entirely replaced.
In other words, each time we “learn something new”, we simultaneously find out that we really don’t know a whole lot; i.e. the more we learn the less we know.
Take the example of gravity. Einstein’s General Theory Of Relativity did not just disprove Newtonian gravity, it also opened the doors to phenomena that scientists at that time did not know about, which have in ensuing decades, been proven to exist*.
In trading and investing, we need to appreciate that we know a lot less than we think we do. Accepting that our knowledge base is always going to change is an important step in realizing that most of the time, we simply do not know what will happen next.
And this is a good thing.
Not knowing is the best possible place to begin, as the mind is clear and open to learning new perspectives and discovering new ways of thinking and doing things.
After all, isn’t the best answer to being asked a question to which you don’t know the answer to in a job interview: “I don’t know, but I’ll find out”?
*If you are interested in this, google gravitational waves and/or black holes
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Einstein Shows Us Why Perspective Is Important For Investors

Thought and knowledge are nothing more than a matter of perspective, subject to constant revision through the passage of time. What is taken to be “true” today can very easily be disproven tomorrow, likewise what is believed to be “false” today can be proven to be plausible tomorrow.
Even the most firmly held beliefs can be disproven and re-theorized.
Take gravity for example. Newton first came up with a conceptual framework of what gravity is in 1798, proposing it to be an attractive force between particles; essentially magnetism, even between non magnetic materials (like magic!).
Einstein then came along in 1915, and showed with his Theory Of Relativity that gravity is due to the curvature in the space-time continuum caused by massive objects.
You would think that the existence and scientific acceptance of a new theory in something as obvious as gravity would cause people to update their views, but… no!
Most people still think of gravity in Newtonian terms, which is largely because schools still teach gravity in Newtonian terms.
Is Einstein’s understanding of gravity what it really is? Chances are no one will ever know, but it is possible, even likely given a long enough time frame, that future physicists will propose new theories of gravity, its nature, and what it is or is not.
The gravity example should illustrate how easy it is for people to hold on to misperceptions.
The human mind, for whatever reason, seems to like to take what it reads, is told, or is taught without question.
This means that we generally do not think or even wonder what the underlying assumptions are. And, if there are any, if those assumptions are relevant and can stand up to rigorous scrutiny.
Moreover, the example raises a serious question: If something as basic as gravity can be misperceived by so many in the general population for more than a 100 years, in the age of the internet no less, how many more misperceptions exist?
Specifically, how many more misperceptions exist in the markets, which are filled with uncertainty and ever changing relationships?
Knowledge is not fixed, and it never has been.
Thinking that knowledge is fixed has the potential to be very dangerous, especially when dealing with risk in dynamic, complex systems, and can lead to one clinging on to theories that no longer work. Needless to say, this is a sure way for a trader/investor to destroy their PnL, or at the very least undergo a deep and prolonged drawdown.
To make matters worse, it is not uncommon in markets to find that theories and strategies that used to work can suddenly reestablish themselves and become viable again.
A good example is the inverse relationship between the performance of growth and value stocks in equity investing. Investing in value stocks tends to do well when investing in growth stocks is going through a run of low performance, and vice versa.
Does this mean that value and/or growth investing is not a viable way of thinking about markets? Not at all, they are viable, but only when the time is right.
In the absence of being able to know in advance when the time will be right, the best we can do is to remember that knowledge is but perspective, and to change the way we think about markets as time and circumstances evolve.
Remember – Einstein!
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You Need To Think In Relatives When Investing

One of the first things new currency traders learn is that theirs is a market of relatives. Every currency is always quoted against another, hence a currency has to go up or down relative to another one.
Saying the EUR went up is a meaningless statement; because – relative to what?
For the statement to have any proper meaning, one has to say the EUR went up against the dollar, or the pound, or whichever currency. (Although most people will assume vs the dollar if no reference currency is mentioned).
Turns out, asking “relative to what?” applies to far more than currency markets.
Headlines provide examples of not seeing the relatives. Take for instance a simple headline about a company’s earnings, which states that its revenues increased. That’s all well and good, but relative to what?
If revenue increased by 20% but costs increased by 25%, then the revenue increase is no longer a positive. Taking another point of comparison, if revenue increased 30% QoQ, that sounds absolutely amazing, but what if revenue is seen from a YoY perspective?
Maybe from the YoY point of view, revenue was flat, and further investigation reveals that at the same point in the calendar last year revenue jumped by about 30% as well. Therefore 30% QoQ jumps between these two quarters are nothing extraordinary, just a matter of seasonality.
All of a sudden, the headline does not look so bombastic anymore.
Here’s another example to further drive home the point:

Always remember to ask: relative to what?
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