I read Nassim Taleb’s new book, The Black Swan, as did John Mauldin. In his comments this week, Mauldin talks about predictions, understanding their limitations.
By definition, we cannot know the future. Yet we go through the exercise. And even though we should know that we will probably be wrong, there is a value on the process if done with the proper amount of cautious optimism tempered by reality.
I think about the future not just to look for opportunities to invest but primarily as a thought process to assess wherein lies the risk. The first task of an investor is to manage risk and only secondarily to seek attractive returns. We make predictions about the future so as to think about risk and to seek places for opportunity. And then every so often, we re-assess our predictions in the light of new information and adjust our risk controls and objectives.
For many of us, making predictions, having a scenario, is about the process rather than the product. I’m not very good at big concept, abstract thinking. I do much better with throwing out a trial prediction, then determining if it is “good enough” by asking questions. That doesn’t mean the prediction is right, just that I don’t see anything wrong with it on the basis of the information available. Hopefully, I will have considered a broad spectrum of questions and risks, so even if a black swan arrives, it isn’t catastrophic.