Weekend Wisdom: The Certainty of Doubt

"If a man will begin with certainties, he shall end in doubts; but if he will be content to begin with doubts, he shall end in certainties." ~ Francis Bacon, Advancement of Learning

Last week we pondered the media pundit ponderings over the definition of recession and if the U.S. economy is (or is not) in the midst of one now.  I noticed similar questions this week across the blogosphere that essentially wondered if we are in a Bear market rally (temporary but significant rise in stock prices during a Bear market), or if a new Bear market has begun at all.

In the true spirit of a philosopher, I am inclined, as Francis Bacon suggests, to "begin with doubts" by addressing those kind of questions with more questions:  Even if we could, with absolute certainty, say that we are in a recession or not and that we are in a Bear market rally or another leg of a Bull market, what would we do with the information?  How can we be certain either way?  Shouldn't we adhere to the same investment strategies, regardless of current economic and market conditions?

"Those who have knowledge, don't predict.  Those who predict, don't have knowledge." ~ Lau-tzu

I understand that the answers to those questions will differ, depending on the nature of your investment style and strategy.  And, of course, I frame this in the context of a long-term view, but the prudent investor will frame investment decisions through the lens of risk management rather than market timing and prediction science.  Is it not prudent to act as if we are in a Bear market rally and that we are in the midst of recession rather than wager that the Bull market is alive and well?  Is the apparent  risk worth the prospective return?  Should an investor not be at least a bit more defensive now than they were one year ago? 

Let's consider a few points (hat tip to The Kirk Report) that should have us yielding  to the side of doubt and asking more questions for our own investment style and strategy:

• Oil is blowing past $125.
• Weak home sales data.
• Consumers turning to credit cards in surprising numbers.
• A significant decrease in boomer spending.

Of course, the real prudent investor will do as one of my favorite financial philosophers, Warren Buffett, advised to a long-term investor this week:

I would just have it all in a very low-cost index fund from a reputable firm, maybe Vanguard.  Unless I bought during a strong bull market, I would feel confident that I would outperform... and I could just go back and get on with my work.

Well said, Mr. Buffett.  Ultimately, our money should not be a means to an end but quite the opposite and our priorities should be shaped accordingly...

What do you think?  Are we in a bear market rally?  Does it matter if we know?  Won't the market just do what it does, anyway?

Personally, my only real certainty is that there is much to doubt...

Related Posts: 

Finding God in Personal Finance

Where to Invest 2008

TFPAuthor, Kent N. Thune, QPFC, is the President and founder of Atlantic Capital Investments, LLC (ACI), a 'fee-only' financial planner and Registered Investment Advisory firm located in Mount Pleasant, SC.

Comments

[Shilpan]

Kent,

It does not matter if we are in bear or bull market as it is evident from the wise trail of Mr. Buffet that if we buy when others sell and vice-a-versa, we all can do just fine. Also, if we learn to live within our means and focus more on the life than on the material wealth, these cyclical hiccups won't have any bearing on our vision for the long haul.

You have a great blog. I just subscribed. Please visit mine when time permits.

Shilpan

[The Financial Philosopher]

Shilpan:

Excellent point! We should focus only on what we can control, such as the allocation of our time, money and investments. The market and economy certainly do not fall under the category of items we can control!

Thanks. Your blog looks quite interesting...

Kent