Those who have knowledge don?t predict. Those who predict, don?t have knowledge

April 17th, 2007

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In this time of rampant financial speculation and gambling, we should again remind ourselves of the wise words of Lao Tzu, an ancient Chinese philosopher, ?Those who have knowledge don?t predict. Those who predict don?t have knowledge.?

Exactly what do we mean by ?predict?? Surely, if we are in the business of investing, we have to do some form of ?prediction.? Otherwise, we may as well hide our money under our pillow and do nothing. But if you think about it, doing nothing about your money is also a form of ?prediction.? By doing that, you are ?predicting? (more accurately, assuming) that your money is worth as much today as in the future (i.e. there is no risk of price inflation).

When we say that we should not predict the financial markets, we mean that we should not have assumptions of what is going to happen in the future and base our investment decision according to these assumptions. When we do that, we will not have any contingency plans to deal with what may happen if our assumptions turn out to be wrong. If we listen to our thoughts carefully, we will surely uncover many assumptions that we have made. Often, assumptions are used to substitute gaps in knowledge.

If our lack of financial literacy results in us making too many assumptions, the results will eventually show up in loss of wealth. For some people, such loss can threaten their financial security. To give you an example, we recently heard this assumption, which was manifested in the form of an advice: ?Don?t worry about investing in property. They will never go down in value in the long run.? Try telling that to the Japanese in the early 1990s when their property bubble crashed?those who bought and held out at the top had to wait for decades to recoup their loss. Today, we marvel at those ?investors? who recently flocked back into the property market in Australia. Are they still making the same assumption in the face of contrary evidence? Make no mistake about this: we believe Australia?s property market still has room for further deflation, either in nominal terms or in real terms (see Can Australia?s deflating property bubble deflate even further?). We will discuss about this soon.

So, watch the assumptions hidden inside the inner recess of your mind!