Investing in Babylon: What we do not know
by David L. Bahnsen
Posted on Tuesday, October 13, 2015, at 5:14 pm
We do not know what we do not know, to butcher and sort of combine quotes from Socrates and Donald Rumsfeld.
The first column in my three-part series focused on the fact that most middle-class Americans have some capacity to invest, to put excess capital or income to work for the purpose of generating a return. The column demonstrated that risk (of some variety) is a part of the definition of investing. The pursuit of risk premium is what we in the portfolio management field do. The column also was the exhortation of the parable of the talents.
We do not know what tomorrow will hold, which is a pretty broad and non-controversial statement. A certainty of outcome is not a requirement for a responsible Christian in finance, because it is not even possible in finance, or any other human endeavor for that matter. Life contains a series of risk/reward propositions, and we do not know when we invest exactly how a given scenario will play out. Our own small and family-run businesses are subject to risk. Our jobs are subject to risk. The funds in our 401k’s are subject to risk. Our gold coins, our cash in the bank (read: inflation risk), our houses, our college educations, and certainly our investment portfolios—they are all subject to some sort of risk. We live our lives with the certainty of a God who is in control, and the uncertainty of not knowing exactly what that will mean today or tomorrow.
We see investors attempting to know what cannot be known, and in so doing take on a confidence or certainty that rarely works well. “The chart says that this stock is about to …” or, “I read a newsletter that warned that such and such is going to …” are common phrases uttered by people who ought to know better. A very tightly defined risk criteria should exist when one begins the process of intelligently deploying capital, and that criteria should cover the traditional risks like price risk and default risk, but also matters concerning inflation, liquidity, tax exposure, etc. Defining risk is not to say we know what we do not know; it is to acknowledge that certain things cannot and will not be known, and to put reasonable and prudent governors around those risks. We don’t know of any “sure things” as believers, but we do know that risk management is a good place to start addressing what you—or anyone else—can know.
Investors have every right, and perhaps every obligation, to try and take the smartest risks they can take. A very wise and experienced technology executive may have an upper hand when choosing to seed money into new technology investments, but he or she did not become immune to the risks of what can go wrong. One of the most common dangers that investors subject themselves to is false confidence—especially after something has gone right. “I knew gold was about to go down,” or, “I knew this area was hot for real estate”—these can be statements with partial components of truth, but they are hardly risk-free.
And that is OK: A biblical worldview of investing does not require omnipotence. In fact, a humble acknowledgement of what we do not know is a pretty good place to start.