People believe they know things they don’t and focus their energy trying to know the unknowable, rather than focusing on those things we can know and can control. The problem starts with one of the most read and respected investment books.

“An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return. Operations not meeting these requirements are speculative.

-Benjamin Graham, “The Intelligent Investor”, 4 ed., 2003, Chapter 1, page 18.

The trouble with that statement is that it promises the impossible. That is, I believe all operations are speculative and we do best by treating them as such.

First, let’s define the terms, according to Merriam-Webster.

A promise is:

 “a statement telling someone that you will definitely do something or that something will definitely happen in the future.”

Analysis is:

“detailed examination of the elements or structure of something, typically as a basis for discussion or interpretation.”

Speculative is:

“engaged in, expressing, or based on conjecture rather than knowledge. (of an investment) involving a high risk of loss.”

So, to be sure we understand the meaning, let’s read it again and then interpret what it means using these definitions.

“An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return. Operations not meeting these requirements are speculative.”

In other words, it suggests if you do a thorough examination of the operation, you will gain “safety of principal and an adequate return” and that will definitely happen in the future.

If you have ever wondered why so many don’t do well at investment management, this is one reason. They believe they can do thorough analysis up front that that will assure the outcome and protect against loss.

It doesn’t actually work that way.

We never know for sure in advance. And, if we focus on the things that do matter, we don’t need to know what will “definitely happen in the future”. The exit, not the entry, determines the outcome. The trouble with much of the value investing philosophy, whether buying private companies or exchange traded securities, is the assumption that you can determine what will happen next. But when you are so confident in that, you end up caught in a loss trap when you are wrong with no way out. Instead, the outcome is completely determined by our exit: how we get out of it.

So, I treat all operations as “speculative”. All operations have a high risk of loss.

And, all things are “conjecture”.

Conjecture:

“an opinion or conclusion formed on the basis of incomplete information.”

That is, we always have incomplete information. We never know it all. To me, it makes a lot more sense to focus on the direction prices are trending and know I’ll create my results by my exit, not my entry. I focus my energy on defining the direction and when it’s going in the wrong one… so I can exit.