Investing in the Unknown and Unknowable

February 27, 2014 Leave a comment

Investing in the Unknown and Unknowable

by VW StaffFebruary 21, 2014, 5:00 pm

David Ricardo made a fortune buying bonds from the British government four days in advance of the Battle of Waterloo. He was not a military analyst, and even if he were, he had no basis to compute the odds of Napoleon’s defeat or victory, or hard-to-identify ambiguous outcomes. Thus, he was investing in the unknown and the unknowable. Still, he knew that competition was thin, that the seller was eager, and that his windfall pounds should Napoleon lose would be worth much more than the pounds he’d lose should Napoleon win. Ricardo knew a good bet when he saw it.

This essay discusses how to identify good investments when the level of uncertainty is well beyond that considered in traditional models of finance. Many of the investments considered here are one-time only, implying that past data will be a poor guide. In addition, the essay will highlight investments, such as real estate development, that require complementary skills. Most readers will not have such skills, but many will know others who do. When possible, it is often wise to make investments alongside them.

Though investments are the ultimate interest, the focus of the analysis is how to deal with the unknown and unknowable, hereafter abbreviated UU. Hence, I will sometimes discuss salient problems outside of finance, such as terrorist attacks, which are also unknown and unknowable.

This essay takes no derivatives, and runs no regressions. In short, it eschews the normal tools of my profession. It represents a blend of insights derived from reading academic works and from trying to teach their insights to others, and from lessons learned from direct and at-a-distance experiences with a number of successful investors in the UU world. To reassure my academic audience, I use footnotes where possible, though many refer to accessible internet articles in preference to journals and books. Throughout this essay, you will find speculations and maxims, as seems called for by the topic. They will be labeled in sequence.

 

Filed under Investing Process

Unknown's avatarAbout bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

Leave a comment