Known Knowns and Unknown Unknowns

“Swami uncle, how do you know that Ganpati Bappa goes to his home elsewhere after we immerse him?” asked Jigneshbhai’s son as we were returning after immersing the Swami’s Ganesh idol after this year’s festival.

It was Swami’s turn to be at the receiving end of questions this time from our broker friend’s son. Jigneshbhai was having a naughty smile as he was enjoying the reversal of fortune – from Swami’s questions to Swami being asked questions.

“How can all lakes and seas reach his home?” Jigneshbhai’s son continued. “Do you have proof that Ganpati Bappa reaches home?”

Swami was lucky that we soon reached our coffee-house, and our families left us alone with our weekly coffee routine, and so the questions stopped.

“Your son asks a lot of questions!” Swami finally said, after they were all gone.

“For once, I did not face your questions! Or his!” my broker friend laughed.

“So how would you answer them? Of course, we know the real Ganpati Bappa goes nowhere. But next he would ask me if there was any proof if Ganpati Bappa was real?” an exasperated, god-fearing Swami exclaimed.

Jigneshbhai stayed silent for a while. He was probably lost in some thought.

“Well if we don’t have conclusive proof that he exists, we also don’t have conclusive explanation to negate the theory that he does exist!” Jigneshbhai stated.

That left Swami and I a bit confused. But our broker friend continued.

“There are the known knowns – like oxygen is necessary for life, and then there are the known unknowns – like we don’t know how life originated or if God exists for sure. But there are also the unknown unknowns – like maybe we don’t even know what we don’t know about the possibilities in the endless universe or in the future!”

Swami and I looked at each other, wondering whether our broker friend was fine. He seemed in fine health a few moments back, but suddenly he had escaped into an unknown orbit.

Unlike our normal confused faces in such situations earlier when Jigneshbhai gave some profound theories, this time our faces indicated outright amusement. Perhaps that’s the reason our broker friend too broke into laughter.

“I am not joking!” he said. “Isn’t it right? Even Donald Rumsfeld when once asked if there was enough proof that Iraq had weapons of mass destruction used something like this. Maybe he meant it, or maybe he was justifying the war – who knows!”

Indeed that was true. I distinctly remembered that, and it became a topic of contention for a long time. But it actually demonstrated the realities of taking decisions at the highest centers of power with an understanding of what is known, what is unknown, and an appreciation of how little may be actually known.

While Swami and I were musing about the known knowns and unknowns unknowns in our life, our broker friend, in a jovial mood today, intercepted our thoughts cheekily. “Like whether the markets will oblige him is a big unknown for Swami!”

Obviously that little provocation was enough for Swami to get started. “Maybe” he said sarcastically, “but most else in your investing domain is based on numbers and metrics isn’t it? So it should fall into known knowns!”

“Well” said our broker friend. “Numbers give you a false sense of knowing.”

Swami and I were starting to understand what our broker friend was trying to get at, and why his answers are often in shades of black and white – specially to Swami’s questions on buy or sell. But it still wasn’t fully clear so we were lost in thought.

Jigneshbhai continued.

“There are many known knowns in investing – like high profitability is good, or low P/E is cheap. And then there are known unknowns – like what will the market do in the next month, or who will be the next RBI governor. But there are also the unknown unknowns – like we don’t know what technologies or trends will emerge and impact business.”

“The important thing is to collect as many knowns as you can, and build an appreciation of their limitations due to the possibilities of the unknowns. And then act with openness.”

While we were engaged in this discussion on knowns and unknowns, the wealthy old man in the sprawling bungalow walked over to our table. He had been quietly listening to our conversation, and as we were preparing to walk, he looked at Swami and I and left us with some words of wisdom, emerging from rock music, perhaps?

There are things known, and things unknown, and in between are the Doors.

Guru Speak: Timeless Wisdom from Benjamin Graham

bengrahamBenjamin Graham, widely known as the Father of Value Investing, was a professor and an investment manager. Known as the founding father of the profession of security analysis, Graham wrote two of the most valuable books in the area of investing: “The Intelligent Investor” and “Security Analysis”. Credited by Buffett as the key influence on his investing approach, Graham is also famous for his timeless gems of investing wisdom that have stood the test of time.

1. Most of the time common stocks are subject to irrational and excessive price fluctuations in both directions as the consequence of the ingrained tendency of most people to speculate or gamble… to give way to hope, fear and greed.

2. Wall Street people learn nothing and forget everything.

3. The individual investor should act consistently as an investor and not as a speculator. This means… that he should be able to justify every purchase he makes and each price he pays by impersonal, objective reasoning that satisfies him that he is getting more than his money’s worth for his purchase.

4. I am no longer an advocate of elaborate techniques of security analysis in order to find superior value opportunities.

5. To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks.

6. Even the intelligent investor is likely to need considerable willpower to keep from following the crowd.

7. It is absurd to think that the general public can ever make money out of market forecasts.

8. If you are shopping for common stocks, choose them the way you would buy groceries, not the way you would buy perfume.

9. Individuals who cannot master their emotions are ill-suited to profit from the investment process.

10. The underlying principles of sound investment should not alter from decade to decade, but the application of these principles must be adapted to significant changes in the financial mechanisms and climate.

11. Obvious prospects for physical growth in a business do not translate into obvious profits for investors.

12. The investor’s chief problem – and even his worst enemy – is likely to be himself.

13. Finance has a fascination for many bright young people with limited means. They would like to be both intelligent and enterprising in the placement of their savings, even though investment income is much less important to them than their salaries. This attitude is all to the good. There is a great advantage for the young capitalist to begin his financial education and experience early. If he is going to operate as an aggressive investor he is certain to make some mistakes and to take some losses. Youth can stand these disappointments and profit by them. We urge the beginner in security buying not to waste his efforts and his money in trying to beat the market. Let him study security values and initially test out his judgment on price versus value with the smallest possible sums.3

14. Most businesses change in character and quality over the years, sometimes for the better, perhaps more often for the worse. The investor need not watch his companies’ performance like a hawk; but he should give it a good, hard look from time to time.

15. Basically, price fluctuations have only one significant meaning for the true investor. They provide him with an opportunity to buy wisely when prices fall sharply and to sell wisely when they advance a great deal. At other times he will do better if he forgets about the stock market and pays attention to his dividend returns and to the operating results of his companies.

16. The most realistic distinction between the investor and the speculator is found in their attitude toward stock-market movements. The speculator’s primary interest lies in anticipating and profiting from market fluctuations. The investor’s primary interest lies in acquiring and holding suitable securities at suitable prices. Market movements are important to him in a practical sense, because they alternately create low price levels at which he would be wise to buy and high price levels at which he certainly should refrain from buying and probably would be wise to sell.

17. It is far from certain that the typical investor should regularly hold off buying until low market levels appear, because this may involve a long wait, very likely the loss of income, and the possible missing of investment opportunities. On the whole it may be better for the investor to do his stock buying whenever he has money to put in stocks, except when the general market level is much higher than can be justified by well-established standards of value. If he wants to be shrewd he can look for the ever-present bargain opportunities in individual securities.

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