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The Emerging Bubble in 'Certainty'

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The more we're faced with uncertainty, the more we're wired to desire absolutes. But this is dangerous for investors in many ways.

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As an investor, you are barraged with risk – economic risks, personal biases, companies overstating results, and rapidly shifting trends are just a small sampling of obstacles we all face. I believe another risk has recently emerged; coupled with technology and media advances, it is a dangerous investing risk you need to have on your radar. What is this risk you ask? Inflation? The dollar? Japanese Central Bank intervention? The next Cyprus? Those may all be risks, but this subtlety emerging risk is an expanding bubble in certainty. Certainty? Certainly.

As trends become more pronounced, and especially as they extend in duration, certainty have levitated to amazing levels. It wasn't enough to merely caution investors about bond market risks in December of 2012 – statements then warning debt investors expressed a certainty that bonds were indeed a bubble and that interest rates had to rise. Apple (NASDAQ:AAPL) closing in on $700 last fall elicited analysts calling for even more gains, and cavalier calls for certain $1,000+ per share price targets to be quickly met. I could go on, but if you follow the markets closely, you likely see increasing examples of this every day (saying nothing regarding an explosion in hindsight certainty).

Certainty has recently swirled around the concept that investors have no alternative but to be invested in stocks, and that every dip should be bought. It's also reared its head in commentators pronouncing the definite end to the gold market's bull run (interestingly, replacing a certainty that gold prices had nowhere to go but up). Investment comments and analysis, which normally has been represented as opinions, thoughts, or probable outcomes, has somehow experienced a metamorphosis from what is likely to occur into what will occur. Certainty is the new consensus.

A number of reasons likely explain this recent phenomenon. First of all, there has been an unprecedented explosion in content and providers of content. This content expansion has subsequently led to an increase in sensationalistic content as merely expressing possibilities has become passé and an obstacle to viewership gains or page views. Content growth, coupled with technology advances and media accessibility has also given investors an à la carte ability to pick and choose mediums, especially opinion-confirming sources.

It appears the more we are faced with uncertainty, the more we are wired to desire binary answers and absolutes, and to gain comfort from quantitative answers at times when our environment is far from certain. As investors stare at the supermarket shelves of investment commentary, we seem to be demanding certainty and immediate answers. Hence, financial television with 30-second countdown clocks quickly deciphering a multi-national corporation's prospects into a simple "buy" or "sell"!

This can be very dangerous to you as an investor in many ways – it leads to overconfidence in what outcomes are likely, it can keep you from assessing current risks while wearing those blinders of certainty, and it can lead to longer-term frustrations as results that were certain to occur end up drastically different than advertised.

What to do? Embrace uncertainty. Remember that investing can be an incredibly difficult process at times. Learn from investors who have been battle-tested, try to gather information from those who understand and respect how quickly markets can humble investors, and try to maintain looks over your shoulder at what might go wrong, instead of settling for assurances of what is certain to happen.

We live in a very uncertain time. It was Ben Franklin who wrote, "but in the world nothing can be said to be certain except death and taxes." That is commentary that has lasted 224 years.

This article by Ross Heart was originally published on See It Market.
No positions in stocks mentioned.
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