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Ever since the press started covering the financial crisis, all we hear is that ‘uncertainty is derailing stock markets’, says Barry Ritholtz. But the author of influential financial blog The Big Picture says this idea is nonsensical.
Uncertainty is “an essential part of markets, and indeed life”, says Ritholtz. “The future is by definition unknowable and therefore uncertain.” Those who complain about it reveal how little they actually understand, not just about investing, “but about the human experience”.
For starters, says Ritholtz, markets wouldn’t work if we lived in a certain world. “Investing requires there to be differences of opinion. When there is broad agreement as to an asset’s fair value, trading volume falls. Without any uncertainty, who would take the opposite side of your trade?”
If anything, it’s apparent certainty that should worry investors, he says. That’s because whenever humans are certain about something, they are usually wrong.
“In rare instances, when there is a near-total lack of uncertainty in the market, the outcome is usually a spectacular disaster. Think of the false certainty surrounding the peak of the dotcom bubble (profits don’t matter!), or the nadir in March 2009 (the abyss awaits!) to validate just how true this is.”
Of course, now we face a long list of important uncertainties. A eurozone collapse, the potential for another US recession, and the US election are the main ones. But while they might seem serious, says Ritholtz, they don’t really undermine investing.
“I do not recall anyone saying investing was difficult due to the uncertainty caused by a potential nuclear conflagration between the US and USSR during the Cold War. Is the Greek situation today more dire and uncertain than the policy of MAD — mutual assured destruction — ever was?”
The fact is, all of the events we are unsure about today will be revealed eventually. That’s how a linear timeline works. Given that’s so obvious, why is everyone so worried about uncertainty at the moment?
The answer, says Ritholtz, is that humans like to live “in a happy little bubble of self-created delusion”. We like to rationalise everything we do and think that it all fits into our chosen narrative. But every now and then, reality presses up against us and pierces through that bubble.
The ongoing financial crisis has disturbed the comfortable story we liked to believe. It’s one of those moments when “the facade fades, the curtain gets pulled back, the ugly reality becomes known to us. We get a glimmer of understanding our own lack of understanding”.
But don't worry, Ritholtz doesn’t think it will last long. It’s just one of “those all too rare instances when we mortals briefly acknowledge reality. When it passes, we all manage to go back to our previously constructed artificial reality.”
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James McKeigue
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