Greenville Business Magazine 2010 June issue : Page 12

››columns Things We Know We Know BY ALLEN GILLESPIE | PHOTOGRAPH BY IMAGE TO IMPACT “ L ove him or hate him, Donald Rumsfeld’s famous quote is an excellent way for you to frame your decision-making when approaching the market. As an investor, you can know what products and services the companies you invest in make and sell (a known known). However, you can only roughly predict how much product will be sold quarter to quarter and year to year (a known unknown). We are currently seeing a wave of crude oil and the Greek/ Euro tragedy washing up on our shores. We know we cannot predict with any accuracy how regulators and politicians will react or what changes they will make to the regulatory, politi- cal or currency structure (more known unknowns). Finally, there are unknown unknowns, risks that we were unaware of — think of events like 9/11 or the volcano in Iceland shutting down air travel across Europe. When viewed this way, it is obvious that financial markets are a risky place because there is very little we actually know we know. Currently, in Germany investors are panicking as the govern- ment prints up a trillion new Euros to bailout Greece, Portugal, Italy, Ireland and Spain, dropping the value of current cash 12 GREENVILLEBUSINESSMAG.COM | JUNE 2010 There are known knowns. These are things we know that we know. There are known unknowns. That is to say, there are things that we know we don’t know. But there are also unknown unknowns. There are things we don’t know we don’t know. – Donald Rumsfeld When markets get volatile it is because many of the unknowns are becoming known and the markets must reprice them. A year ago, you did not know Greece had a debt prob- lem, now you do. The price tag is a trillion Euros. With so many unknowns, what should you do? First, diversify to protect yourself against your limited knowledge. Concentrate only when you have a lot of known knowns. Your investment position size should be proportional to your knowledge of the situation. Because there are usually many unknowns, the opportunity to concentrate your posi- tions are rare even for the best investors.. Second, bid low prices to protect yourself in an environ- ment where unknowns are becoming knowns. Finally, do not allow the appearance of unknowns over- whelm your known knowns. So,what do we know we know? Bad environments pass with time — recessions and panics do not last forever. Certain products and services will be desired regardless of the price of a Euro — there will always be relatively stable demand for milk and taxi cabs. If you buy at a low enough price, you will probably be rewarded for taking the risk, so look for opportunities to buy rather than sell when investments go on sale during periods when unknowns are becoming known. ■ Allen R. Gillespie is a principal of GNI Capital, responsible for portfolio management and investment research for all of the company’s managed assets. The information contained herein should not be considered investment advice. Please consult with your investment professional before making any investment decision. ” holdings. Sure, on paper you still have the same number of Euros but they are now worth less because there are more of them.

>>columns - Things We Know We Know

Allen Gillespie

Love him or hate him, Donald Rumsfeld’s famous quote is an excellent way for you to frame your decision-making when approaching the market.

As an investor, you can know what products and services the companies you invest in make and sell (a known known).

However, you can only roughly predict how much product will be sold quarter to quarter and year to year (a known unknown).

We are currently seeing a wave of crude oil and the Greek/Euro tragedy washing up on our shores. We know we cannot predict with any accuracy how regulators and politicians will react or what changes they will make to the regulatory, political or currency structure (more known unknowns).

Finally, there are unknown unknowns, risks that we were unaware of — think of events like 9/11 or the volcano in Iceland shutting down air travel across Europe.

When viewed this way, it is obvious that financial markets are a risky place because there is very little we actually know we know.

Currently, in Germany investors are panicking as the government prints up a trillion new Euros to bailout Greece, Portugal, Italy, Ireland and Spain, dropping the value of current cash holdings. Sure, on paper you still have the same number of Euros but they are now worth less because there are more of them.

When markets get volatile it is because many of the unknowns are becoming known and the markets must reprice them. A year ago, you did not know Greece had a debt problem, now you do. The price tag is a trillion Euros.

With so many unknowns, what should you do?

First, diversify to protect yourself against your limited knowledge. Concentrate only when you have a lot of known knowns. Your investment position size should be proportional to your knowledge of the situation. Because there are usually many unknowns, the opportunity to concentrate your positions are rare even for the best investors..

Second, bid low prices to protect yourself in an environment where unknowns are becoming knowns.

Finally, do not allow the appearance of unknowns overwhelm your known knowns.

So, what do we know we know?

Bad environments pass with time — recessions and panics do not last forever. Certain products and services will be desired regardless of the price of a Euro — there will always be relatively stable demand for milk and taxi cabs. If you buy at a low enough price, you will probably be rewarded for taking the risk, so look for opportunities to buy rather than sell when investments go on sale during periods when unknowns are becoming known.