Unknown unknowns in the economy...

How we are positioning with the known knowns

"As we know, there are known knowns. There are things we know we know. We also know there are known unknowns. That is to say, we know there are some things we do not know. But there are also unknown unknowns — the ones we don't know we don't know. And if one looks throughout the history of our country and other free countries, it is the latter category that tends to be the difficult ones.

-Donald Rumsfeld1 2002

The judge of a man is always on his integrity and the process of his thinking. What we never want to do is to judge him on the consequence of his decision.

While Donald Rumsfeld is often vilified for his decision in Iraq, his courage to address the unknown unknowns is commendable since it could have been consequential to the world.

Most of us would not need to make such tough decision.

But in investment, we often need to deal with the unknown unknowns.

  • The unprecedented printing of money had flushed the economy with cash but what is the consequence? Will the consequence of these loose monetary policy be closer to Japan or Zimbabwe or something we had never experienced before?

  • The successful deployment of vaccine has open up economy and consumers are out in droves in the Europe and U.S. driving up prices as supplies are limited. Is this price increase transient or a secular trend?

  • The new Delta variant is propagating through the world right now. Will more deadly Covid variants pop up to cause more damage? Would the various vaccine work to protect or will it fail as the delta variant evolve?

While we continue to grapple with these problems which we will never know till it happens, there are definitely some known knowns in the world!

  • Cycle of boom and bust will always happen. If the loose monetary policy creates a boom, we are sure that a bust will be coming.

  • Capitalism has worked its magic since the industrial revolution and we cannot see why it should not work into the future.

  • Demand and supply always swing to the excess but it does usually move towards equilibrium and stay there for a while.

  • Joseph Schumpeter’s creative destruction is an evolutionary process which rewards improvements and innovations trending toward progress, growth, and higher standards of living.

  • In order to survive, the Covid virus need most of us to survive. The Covid virus will evolve towards a milder strain causing us enough pain but not so much that we will die from it?2

So what are the things we known knowns for portfolio construction?

  • Investing require patient to sit on your arses for a long period of time with inactivity while waiting for the right pitch to come along.

  • Intelligent investing is always value investing by buying dollar bills for fifty cents.

  • Adequate diversification is a useful concept for most investors as humility is a good concept to have.

  • Sizing your position according to your conviction level will help drive the highest portfolio return.

  • Long term investing involve holding a companies for decades enjoying their growth and selling before they go into permanent decline.


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1

In memory of Donald Henry Rumsfeld, politician and businessman, born 9 July 1932; died 29 June 2021

2

We are not so sure of that now.