John Kenneth Galbraith’s astute observation, “There are two kinds of forecasters: those who don’t know, and those who don’t know they don’t know,” encapsulates the inherent challenge of predicting market behavior. Galbraith’s emphasis on the cyclical nature of financial markets is equally important.
History has shown that market bubbles and crashes tend to repeat themselves, often with surprising regularity. Investors with short memories are prone to forget the lessons of the past, leading to excessive optimism during periods of euphoria and unwarranted pessimism during downturns.
Howard Marks writes, “When people get rich, others take that to mean they’re smart. And when investors succeed, it’s often assumed their intelligence can lead to similarly good results in other fields.
Further, successful investors often come to believe in the strength of their own intellect and opine about fields with no connection to investing. A lot has been said about those who express certainty. We all know people we’d describe as “often wrong but never in doubt.”
The Importance of Intellectual Humility
Richard Feynman’s adage, “The first principle is that you must not fool yourself, and you are the easiest person to fool,” highlights the cognitive biases investors face. In a field marked by uncertainty, intellectual overconfidence and hubris. Unlike the ego-driven pursuit of out performance often seen in the investment industry, intellectual humility involves recognizing one’s limitations. It includes a willingness to question assumptions, seek diverse perspectives, and admit mistakes.
This mindset is vital for navigating the complexities of financial markets, where conditions constantly evolve and unexpected events can arise. Intellectually humble investors are more likely to engage in rigorous research, critically evaluate information, and avoid cognitive biases like confirmation or hindsight bias. “Intellectual humility means saying “I’m not sure,” “The other person could be right,” or even “I might be wrong.” I think it’s an essential trait for investors; I know it is in the people I like to associate with... No statement that starts with “I don’t know but . . .” or “I could be wrong but . . .” ever got anyone into big trouble.
If we admit to uncertainty, we’ll investigate before we invest, double-check our conclusions and proceed with caution. We may sub-optimize when times are good, but we’re unlikely to flame out or melt down. On the other hand, people who are sure may dispense with those things, and if they’re sure and wrong, as the Twain quote suggests, the outcome can be catastrophic... maybe Voltaire said it best 250 years ago: Doubt is not a pleasant condition, but certainty is absurd,” mentions the Howard Marks memo.
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