My wife, Geni, is a wonderful woman, and I'm fortunate to have married her. But Geni has strong opinions. She rarely expresses doubt about things. She sees issues as distinctly black or white. Her absolute conviction often strikes me as incautious or even foolish. I've told her that we'll inscribe her gravestone with the following epitaph: "Often wrong, but never in doubt."
Investing is replete with opportunities to express strong conviction. We put money to work when we're confident we have selected a good investment. We know the company and believe it promising. We've followed a potential investment for some time, and are convinced it's now time to buy in. Or we decide to stay out of the market or out of a specific asset class. It's too pricey, or it's set for a fall, or it's going out of favor and we should keep our money on the sidelines. We invest (or resist investing) based on our convictions.
Experience suggests many investors fail to give adequate consideration to the question "What if I'm wrong?"
Blaise Pascal was a 17th-century French philosopher, mathematician and physicist. He's remembered today in part for "Pascal's Wager." Pascal's Wager argues that a rational human being should answer the question "Does God exist?" in the affirmative. If God does not actually exist, such a person will have only suffered minor losses (foregoing certain pleasures or luxuries). If God does exist, believing in God will provide infinite gains (eternity in Heaven) while avoiding infinite losses (eternity in Hell).
The "Wager" in Pascal's thinking is based on the assumption that one of two alternatives is true—God either exists or doesn't exist. Humans have to live their lives, make their bet if you will, believing in one or the other. Pascal reminds us that all decisions have consequences, to a greater or lesser degree. Perhaps most important, Pascal's Wager tells us to factor in our decision-making the consequences if our decision turns out to be wrong.
Pascal is not disavowing strong conviction; rather, he's asking us to formulate that conviction at least in part by understanding how we might be affected should our conviction be misplaced. What if we're wrong? It's a perspective that runs contrary to our nature—once we've made up our mind, we seek information that reinforces our decision and confirms our wisdom.
Serious consideration of the question does not mean the potential investment is wrong. It might suggest, however, that individuals who make their own investment decisions do what Investec does for its clients. We limit our exposure to particular assets. We include in our portfolios asset classes that may react to market forces in a non-correlated fashion. We diversify across various asset classes. We invest for the long term, and don't react with too much optimism or despair as markets fluctuate.
As an individual, if you're inclined to pull out of the market altogether, believe a particular asset class should be shunned, or want to double down on a particular stock or fund, consider the implications if you are wrong. Can you live with the consequences if events unfold in a manner opposite what you would have predicted? It's counter-intuitive (and just plain hard!) to second-guess ourselves, to question the certainty of our view. But a discussion with someone who does not share your viewpoint may bring a valuable perspective. At Investec, we're humble enough to explore with clients and others the possibility that an investment hypothesis—theirs or ours--could be wrong, and flexible enough to discuss investment strategies to follow to succeed even if that turns out to be the case.