Difference between Unknown and Uncertain
This is going to be a short post. Have you ever wondered, what is the difference between Unknown and Uncertain and its implications on stock picking.
What is Unknown. Obviously, it is something which is not known. However, it also means that it is knowable. There is a definite answer, just that you don’t know it as yet but someone else might. If one does not know what time is it right now, then the time is unknown to him. However there is a definite answer to the question. He can just look at the watch or ask somebody and it would cease to be unknown.
And what is uncertain. Something is uncertain when there is no definite answer in the first place. So there is no question of knowing it upfront. Uncertain is not just Unknown but also Unknowable to varying degree depending on the complexity of the situation. In a way, Uncertain is Unknown to the power of Unknown.
Consider an example. On railway station A, a train stops everyday on a particular platform. Now if a new guy comes to that railway station, it may be unknown to him. But he can easily ask anybody and find out.
However on Railway Station B, the driver decides the platform based on the outcome of a coin-toss which he does just after entering the yard. Now the new guy can keep asking anybody on the station, the tea vendors, the porters, the information board, the station master, even the train driver himself. Nobody in the world can tell him accurately, which platform the train is going to arrive till the train arrives the yard and coin-toss is done. In this case, the platform is not Unknown. It is Uncertain.
However because of this uncertainty, there will be many charlatans on this station, who will tell him some random platform for a Rupee. In fact, they might as well give him a nice sounding deal, give me a Rupee only if I am right, else give me nothing. Typical Heads I win; Tails I don’t lose anything scenario.
Stock Market is filled with such charlatans, primarily because the situation is very similar to Railway Station B. The only difference is that there is not only one coin-toss involved. It is culmination of multiple coin-tosses (and throws of dice) which muddles up the probabilities even more, increasing the uncertainty by many notches.
Unfortunately, people tend to think that it is like Railway Station A. The popular rationale is that they may not know which stock is going to go up but somebody else might. Hence the endless pursuit of so-called experts whom they can ask for some sure-fire tip, complete with when to buy/sell and at what price.
It obviously doesn’t work. If it did, there would be lot more millionaires retail investors. So what does work.
We believe, thinking in terms of probabilities is a lot better than wishing for certainties. And what has got the best probability. We know for sure that buying a stock which is a good combination of company quality and stock price over a longish term gives you a fairly high probability of great returns. So why not just ignore all the railway station cacophony and focus energy on finding out such stocks.