I have had the silly phrase “surprised and not surprised” stuck in my head for the past couple of years. As far as I am aware I did not read it anywhere and I have not repeated it aloud in the company of others because it sounds ridiculous. It’s a childish phrase that popped into my head when thinking about significant developments in Covid-19, inflation, the war in Ukraine, declassified UAP footage, and the recent downturn in the markets.  

So, what does it mean? If you play card games, you usually have an idea of the number and types of cards in the deck. Throughout the game you may be surprised at the moment a particular card was dealt or the sequence a series of cards were dealt in, but you are not surprised the cards were in the deck. This is what goes through my head when reflecting on recent major events: I was surprised 2020 was the year a global pandemic struck, but was not surprised we had a pandemic. I was surprised to learn when my wife and I were having a kid, but not surprised that it happened. The outcomes were already shuffled in.

If you enjoy probabilistic thinking and risk mitigation, you are probably aware of Donald Rumsfeld’s great press briefing on known-knowns, known-unknowns, and unknown-unknowns. Things we know we know we know, things we know we don’t know, and things we don’t know that we don’t know. “Surprised and not surprised” is my less elegant version of known-unknowns.

“Known-unknowns” or things we know we don’t know, are an interesting group. Some can be moved over to the “known-known” category by applying more research (though there is still an opportunity cost). The other known-unknowns will arrive as thieves in the night… or Russian paratroopers. They will take the form of death (we know we’ll die but not when or how), an unexpected diagnosis (40% of us will have cancer in our lifetime), reversals of fortune, and global events outside of our control. These known-unknowns are anxiety inducing events. They live at the intersection of unpredictability and significant consequences. Furthermore, to swing back to opportunity costs, attempting to improve the predictability of known-unknowns is often a negative trade off vs being present in your daily life. The solution then isn’t to ignore known-unknowns entirely, but the way to counter the known-unknowns of the world is through perspective, planning, and poise (first introduced here)

Perspective: When preparing for a known-unknown event it helps to have a cohesive world view to put the event into perspective. It’s difficult to build perspective on the fly, so in times of peace it pays dividends to understand your personal philosophy, study history, and remain curious. I don’t have a guide to building perspective other than “always be learning,” but maybe the following questions can help you build a base to start from - What is the probability of an event happening, do you understand your locus of control, do you understand what matters, do you have enough good information to act on, what is the cost of increasing/improving information, and could the information you’re receiving be warping your perspective? Perspective then informs our planning.

Planning: Determine the severity of an event happening and the cost to mitigate it. I visit Oregon’s Cannon Beach a couple times a year despite it being overdue for a very destructive earthquake and tsunami. I don’t expect to be at Cannon Beach or even alive when a tsunami hits the Oregon coast, but it’s catastrophic enough to Google the tsunami evacuation plan for Cannon Beach, identify the nearest evacuation site to where I stay, and determine the road to get there. Five minutes on Google is a low cost way to counter a low likelihood yet highly catastrophic event (Note: don’t doom scroll). Do I have an asteroid impact plan though? Nope, since it is low likelihood and requires Bezos-level money to mitigate risk (asteroid defense is the domain of governments). But I have a life insurance plan since I will probably die at some point and the plan is inexpensive compared to the financial hardship my family would endure if I died unexpectedly. Below is a table to identify threats and evaluate whether they are worth planning for.

Poise: I’ve been asked, “Nick, why is poise important?” Well the 3Ps sounded better than the 2Ps for a planning process. Jokes aside, the reason poise is important is because even with perspective and planning, things won’t always go your way. Which is fine. That’s part of the game of life and you should be steady, confident, and have dignity under pressure. Being calm under pressure should be something you aspire to (who wants to follow a leader or be someone who panics?) and it improves your decision making. Whether you’re a hunting guide facing down a charging grizzly (1:18 for this gem) or a fifth grade AAU basketball coach in your first championship, down by two, with fifteen seconds on the clock… Don’t panic. No one makes good decisions when they panic and I don’t know why anyone would want a reputation as someone who panics or fumbles.

What do the 3Ps have to do with financial planning? They’re practically the entire enterprise.

Perspective: We’re all going to die, but we don’t know when. Markets have downturns, but we don’t know when they will nosedive or rocket back to new highs.

Planning: Insurance products (or being self-insured) can help take care of the unexpected. You need an estate plan that doesn’t leave behind a mess for your family. Your investment selection and contribution rates should consider what you can emotionally handle and the likelihood of achieving your goals (both emotions and goals being fortified by perspective).

Poise: There is something deep in my soul that finds negative emotional overreactions revolting (err on optimism > pessimism), but the worst of them all is panicking. Panicking leads to making bad decisions, usually with incomplete information that could have been improved if you simply waited. One example can be scrambling to sell your portfolio as the market is in free fall. Maybe this makes sense if you are a stock picker hopping between trends with no faith in the fundamentals of the companies you invested in. But if you are properly diversified (check planning) then dips, bobs, and weaves are part of the game. Planning gives us the confidence to deal with challenges that would make the unprepared panic. Be like Ripley and CPL Hicks, not PFC Hudson.

What I am Reading and Watching

Marginal Revolution: This might be the internet’s super highway for curated and timely content. After following Marginal Revolution for the past three years I think MR puts me at a minimum of two weeks ahead of the rest of the populace on major fast-moving events (Covid, Ukraine) and years ahead on larger issues (social policy, energy policy). Some of the more interesting articles I share here are reposted from MR.

We can hope: Foreign Affairs article from a former CCP official on how hubris, paranoia, and traditional strong man problems may cause China to trip up.

The March of the Ten Thousand: Despite being a Prime member it took seven days for Anabasis to arrive on my doorstep. I know, first world problems and pretty lame compared to the trek of ten thousand Greek mercenaries from a civil war in Persia to the shores of the Black Sea.

Sequence of Return Risk: GMO White Paper. Will be giving this a read in the next couple of days.