Baupost Group Year-End Letter, 2010
Investors like certainty. They want to know what the economy will do, what the Fed will do, which way the election will go, whether Europe will hold together. They want to know the future before they invest.
This desire for certainty is one of the greatest obstacles to investment success. Here's why: by the time something is certain, it's already priced in. The stock market is a discounting mechanism. It prices in what is known and expected. If you wait until the outlook is clear, you've already missed the opportunity.
The most profitable investments are always made when the future is most uncertain. This is not a coincidence. It is the fundamental mechanism by which markets reward risk.
At Baupost, we don't try to eliminate uncertainty. We try to be compensated for it. The question is never "Is this certain?" but rather: "Am I being paid enough for the uncertainty I'm bearing?"
This is a fundamentally different mindset. Most investors see uncertainty as something to be avoided. We see it as something to be priced. If the discount is large enough, uncertainty becomes opportunity.
Wall Street employs thousands of economists and strategists whose job is to predict the future. Their track record is abysmal. Not because they're unintelligent, but because the future is genuinely unpredictable.
The solution is not to make better predictions. It is to build portfolios that don't require accurate predictions to succeed. This means:
Most investors measure their returns quarterly. Some monthly. This short-termism creates enormous opportunities for anyone willing to measure in years.
The single greatest advantage an investor can have is patience. Not patience as in "sitting around doing nothing"—patience as in the willingness to do extensive work, arrive at a conviction, and then wait as long as necessary for the market to come to you.
In an uncertain world, the patient investor has an enormous edge. They don't need to predict the future. They just need to recognize value and wait.