Controlling the Controllable: A Path to Resilient Investing in a Volatile World
Investors love data: the more, the better. From self-managing retail investors to the largest money managers globally, data is king. And while historical data can serve as a guide to the future, investors must remember that history doesn’t repeat; it only rhymes, and deviations from trends and patterns can immensely impact returns.
Unanticipated and significant events have come to be known as Black Swans, a concept Nassim Taleb popularized in his books Fooled by Randomness and Black Swan: The Impact of the Highly Improbable. Taleb characterizes a Black Swan event as meeting the following criteria:
is so rare that even the possibility that it might occur is unknown;
has widespread ramifications
and is explained in hindsight as if it were predictable.
Remember when Donald Rumsfeld famously used the phrase “unknown unknowns?” During a Department of Defense speech, he used the expression to illustrate the lack of evidence linking Iraq to weapons of mass destruction. He described unknown unknowns as things “we don’t know we don’t know.” Rummy caught some flak for basing major foreign policy decisions on “unknowns.” Still, his speech highlighted that we’re constantly making decisions with limited information — and the things we aren’t even aware we’re lacking are most dangerous.
What does this have to do with investing?
When thinking about the world, we’re inclined to examine the past to develop best and worst-case scenarios. But the world is surprising. At some point, there will be outcomes that trump any best-case scenario ever recorded and catastrophes that no analyst had conceived; this is the nature of the world. And while our brains are more inclined to think linearly, life doesn’t happen in a straight line.
Unprecedented. When you start hearing that word repeatedly, it’s a cue that you might be experiencing a black swan event. The 21st century alone has seen the September 11th attacks, the global financial crisis, and the Covid-19 pandemic, each of which resulted in sharp equity market declines. Of course, the media often uses the term unprecedented to describe very precedented events, so take their sensationalizing with a grain of salt.
Should we be surprised when turmoil occurs?
Wars have been fought for millennia, populations have struggled with pandemics since humans have interacted, and economies have grown and shrunk since the invention of double-entry accounting. It’d be foolish to assume that these consistently occurring events would suddenly cease to occur during our lifetime (as wonderful as that’d be). And yet, we’re caught off guard every time these repetitive events arise.
Our thirst for control (or perception) results from evolutionary forces. Other animals, too, prefer choice over non-choice, even when the options don’t increase the odds of a favorable result. Leotti, Iyengar, & Ochsner argue that this need for control is biological and that organisms want to be “causal agents, rather than passive observers” in their environments (Leotti LA, Iyengar SS, Ochsner KN. Born to choose: the origins and value of the need for control).
Whether or not you subscribe to the biological argument, you’ve likely had a first-hand experience in feeling out of control — and the resulting stress. Ultimately though, as much as we crave a sense of control and loathe the feeling when it’s lacking, there’s very little we can control. In ancient Philosophy, the Stoics talked about the dichotomy of control — categorizing things into one of two groups, those we can control and those we can’t.
On the can-control list is our “opinion, motivation, desire, aversion, and, in a word, whatever is of our own doing.” Not in our control…everything else.
I’m always fascinated by investors’ behaviors. We cannot control the markets, the federal reserve, the greater economy, the leaders of the companies we own, or geo-political events around the world — and yet, we can’t help but take action to feel a sense of control over the world around us, even when those actions are counter to our long-term objectives.
Control the Controllable
The antidote to the anxiety from a lack of control is to focus on the controllable. Even if you were to spend all day, every day, trying to figure out what the world will look like in the future, you’re going to get it wrong.
As technology advances, more data will become readily available. Artificial intelligence will mine the information superhighway for useful trends and patterns — tricking us into believing we have unique insight into the future. But there will always be unknown unknowns, things we don’t realize we don’t understand.
Implementing a suitable investment strategy and maintaining a long-term orientation are two actions within your control. While they don’t guarantee success, they help us survive black swan events and benefit from human progress. We’ll see great progress and major setbacks over the coming decades, and with uncertainty comes great opportunities.
Disclaimer: This article is provided for general information and illustration purposes only. Nothing contained in the material constitutes tax advice, a recommendation for purchase or sale of any security, or investment advisory services. I encourage you to consult a financial planner, accountant, and/or legal counsel for advice specific to your situation. Reproduction of this material is prohibited without written permission from James Vermillion, and all rights are reserved.
