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Location: Nashville, Tennessee, United States

11/19/2002

The Only Thing Certain is Uncertainty
Economist James K. Glassman examines the role uncertainty plays in the economy.

The argument is that investing is fraught with uncertainty, with real risks. The world of business is complicated and unpredictable, and, as Mitchell writes, "the attempt to develop accurate forecasts of earnings or market prices is a fool's errand." Successful investors figure out strategies, not to overcome risk, but to live with it.

Still, Wall Street and Main Street abound with people who think the key to picking winners is to scrutinize income statements more carefully or to build better financial models. But, "no matter how strenuous and ingenious, efforts to slay the uncertainty dragon have always resulted in disappointment, anger, sub-par returns and occasionally criminal behavior."

This is the essential nature of stock investing: It's a dark and risky place. But, as Mitchell puts it, "if investors are to earn a return above the risk-free rate, they have no choice but to invest in securities whose returns are not guaranteed." In fact, stocks have, for the past 76 years, earned a return that, in the average year, is 5 or 6 percentage points higher than the risk-free rate. You don't get returns like that without taking risk.

Stock investors, especially since the early 1990s, have seen high returns as an entitlement. And politicians - as well as some journalists - play into these false expectations, promoting the notion that the only reason people lose out in the market is that someone is cheating them, or not telling them enough about the inner workings of companies. But such concerns are really a distraction. The nature of business is deep uncertainty.

Mitchell is not merely saying that stocks lack a money-back guarantee. He is saying that, when it comes to specifics on how a company will perform, hardly anyone knows anything.

You certainly should read the whole thing.