The Dumbest Investment Mistake You Can Make

Black Swan. Source: Pixabay.

Dear Diary,

There are thousands… millions… gazillions of dots in the universe. Today, we connect two of them.

First, let us note that so Zen-like and calm are investors that the worries of Thursday – triggered by the downing of Malaysia Airlines Flight MH17 over eastern Ukraine – were forgotten by Friday.

The Dow closed up 123 points on the last day of the week. Gold sold off.

So, let’s return to our dots. The first one is epistemological. The second is an important observation about investing.

Beware Black Swans

If you remember from a week or so ago, we concluded that humans can never know – with certainty – anything. That’s just the way it is. We believe things are one way or another… but only until it turns out not to be so.

Since anything may turn out to be untrue, sometime during the life of the universe, everything we think we know must be regarded as a hypothesis.

That’s the problem with man’s knowledge. It is subject to contradiction, nuance and further development.

Especially his knowledge of the future. And since all investing is a bet on the future, it often tends to go wrong.

But although we can’t know what is true, we can know what is not true. Positively. Definitely. Without a doubt.

This was a point made by Nassim Taleb in his book The Black Swan. “All swans are white,” sounded like a true statement to Europeans, where all swans are white and therefore the inductive logic made sense.

Then Europeans discovered there were black swans in Australia. At that moment, Europeans knew beyond a shadow of a doubt that all swans were not white.

You could never prove that “all swans are white.” Because you could never get all the world’s swans together in one place to check them. And even then, you couldn’t be sure if one of them hadn’t been painted white, temporarily, so he wouldn’t feel out of place.