Uncertainty is not Risk

‘Time is the only arbitrage in Investing today’

The above is such a simple and yet profound statement, shared by Vinit Sambre, CIO at DSP Mutual Fund, during a conversation we had last month. Back in the day, information inefficiencies used to be a huge arbitrage in equity markets. However, with the advent of technology, it has become increasingly less significant. So, the longer you stay patient and invested, the better your chances of higher return. You just had to see the traders’ data released by SEBI recently.

As per the study, only one out of 10 traders made profits in FY 21-22

The good news about time (when it comes to investment horizon at least): most of us have it in abundance 😊

Then why is it difficult to use time to create meaningful wealth? Answer: Uncertainty

Human beings hate uncertainty in their lives. We are ill-trained and not really conditioned to handle uncertainty in our lives. Mind you, it’s not as if we despise uncertainty in all settings. We love it while watching a movie or our favourite sporting contest. We just don’t like it our own lives (courtesy this wonderful  The Knowledge Project podcast  with Executive coach Carolyn Coughlin)

As you can imagine, as an equity investor, uncertainty is a real certainty and hence the challenge of staying on course for long periods. Let me share an example. During the covid crisis (Mar 2020) and prior to that Lehman collapse (also known as Global Financial Crisis, 2008-09), equity markets corrected and thereafter saw a V-Shaped recovery. Now the next time we see a similar deep and sudden correction, we would again expect a V-Shaped recovery. Markets might not play out in similar fashion, and we might end up frustrated

Uncertainty is not Risk

And it’s important to know the difference between the two, especially in investing. Seth Godin has written about it beautifully in one of his blogs. This is what he says about uncertainty and I quote.

“Uncertainty implies a range of possible outcomes.

But a range of results, all uncertain, does not mean you are exposing yourself to risk. It merely means you’re exposing yourself to an outcome you didn’t have a chance to fall in love with in advance. “

One can read more about it here : Uncertainty is not risk

So let’s buckle up and start expecting uncertain outcomes as investors ( in life as well, but that’s not our domain really). That’s a ‘certain’ way to build wealth for your passion 🙂