The Price of Certainty

Ian Cassel writes that an investor learns from hindsight and get paid for foresight. Often times an opportunity exists because the conditions aren’t perfect yet. Investor has to pull the trigger in advance of all the pieces coming together. Investment success is determined by two things: First, How well you assimilate imperfect information and Second, Your ability to identify when you are wrong quicker.  

Jeff Bezos of Amazon said the following about decision making. Cassel thinks that it is the perfect description of investing: “Most decisions should probably be made with somewhere around 70% of the information you wish you had. If you wait for 90%, in most cases, you’re probably being slow. Plus, either way, you need to be good at quickly recognizing and correcting bad decisions. If you’re good at course correcting, being wrong may be less costly than you think, whereas being slow is going to be expensive for sure.”

The price of certainty is expensive because it slows you down. We want to know everything. If I just knew a little more. A little more. A little more. But knowing more often times breeds confidence but not accuracy. 

Cassel thinks if Bezos would have continued his quote he would have said focus on the 70% that matters and be okay if the 30% you don’t know hurts you. You have to live with the possibility that you could be wrong. You can’t let the fear of the 30% steal your courage to move forward if you believe the odds are in your favor. 

How can you be both quick and accurate?  Cassel applies four filters to every new company he evaluates: An organization with signs of intelligent fanaticism; A business that can grow through a recession; A balance sheet that can weather a storm and act with occasional boldness; A stock that can conservatively double in 3 years.

When Cassel applies these four filters he might miss something, but it cuts to the core of what is important. He can normally size up a new opportunity that he is attracted to in a few hours. Over the years Cassel found being quick has served better than being slow. If it takes a long time to get to a buy decision then it probably isn’t a buy. The great opportunities are normally obvious, at least to an investor.

In addition, Cassel found buying small and averaging up later as you gain additional conviction is a great way to counterbalance being fast and right with the risk of being fast and wrong. You aren’t going to be right all the time, but try to be wrong as fast as you can and move on. 

“Be willing to make decisions. That’s the most important quality of a good leader. Don’t fall victim to what I call the “ready-aim-aim-aim-aim” syndrome. You must be willing to fire.” – T. Boone Pickens