The simplicity of complexity and the certainty of uncertainty
When it comes to managing a portfolio, it might be better to seek consistency and reliability at the aggregate level while being comfortable with embracing uncertainty at the transaction level
Laws of Physics, from Newton’s laws of motion to mass-energy equivalence (famously captured by Einstein’s E=mc^2), exhibit a certain deterministic simplicity and elegance. Immutable laws that help define the limits of what’s possible, and allow for repeatability, certainty and reliability. Indeed, if that wasn’t the case we couldn’t rely on Bernoulli’s principle to fly planes, or on Maxwell’s laws of electromagnetism to generate electricity.
Yet behind these laws are phenomena and building blocks that are fundamentally uncertain - and that makes physics fascinating. At the subatomic level of particle physics and quantum mechanics, lies a world where uncertainty becomes the norm. The world is no longer deterministic but probabilistic, and concepts like Schrodinger’s Cat or Heisenberg’s Uncertainty Principle seem to have more in common with philosophy than with the orderly laws of physics that define our physical space. The beauty of physics is that the complex, stochastic interactions between billions and trillions of particles, forces and energy lead to the simple immutable laws of physics that govern our very existence.
A related phenomena of complex systems is how aggregating uncertainty leads to increased certainty. Take the example of sunlight. We can predict with a fair degree of certainty that photons take around 8 minutes and 20 seconds to travel from the sun to the Earth. Yet, it's virtually impossible to pick an individual identifiable photon created at the Sun’s core and predict when it will arrive on Earth. This is because the photons bounce around within the Sun, interacting with other photons in a highly unpredictable fashion, before they end up at the Sun’s surface and make their way to Earth. Estimates of the photon’s journey to the edge of the Sun range from a low of 10,000 years to hundreds of thousands, even millions of years depending on assumptions used. During this time, an individual photon might get absorbed and re-created through the various interactions. With all this uncertainty at the micro level, it is futile to predict which photons make their way to earth, but we can be pretty certain how many photons will make their way to earth in aggregate, and how long it takes them to make that journey.
Those who have had the misfortune of reading my articles in the past know that I have a terrible habit of trying to link what I learn to investing, even if it's from unrelated fields. Sadly, today’s article is no exception.
In investing, we find too many people fixated on the next big trade, or finding the next unicorn, or needing to be right in their next big macro call. While these are laudable endeavors, in terms of a broader investment portfolio, getting these right may have similar odds as being able to predict the path of a photon created at the Sun’s core hundreds of thousands of years ago.
When it comes to managing a portfolio, it might be better to seek consistency and reliability at the aggregate level while being comfortable with embracing uncertainty at the individual transaction/strategy level.