Things I Know I Don't Know

Mingelgreen Shoots1

Issue | 4


Howard Marks, famed investor and memo writer extraordinaire, likes to say “It ain’t what you don’t know that gets you in trouble, it’s what you know for sure that just ain’t so.” It’s a Mark Twain quote, an admission that false belief can be more dangerous than simply not knowing. For those finding some extra time to catch up on streaming services while in quarantine,2 the quote is also the opening words of the movie The Big Short, an event in financial history perhaps most apropos to the ramifications of “knowing” something that turned out to not be true. It ain’t what you don’t know that gets you in trouble, it’s what you know for sure that just ain’t so. Recite. Repeat. Retain.

In Thinking in Bets,3 author Annie Duke, a former professional poker player who was awarded a Fellowship to study Cognitive Psychology at the University of Pennsylvania, guides on embracing uncertainty. Her book’s sub-title, Making Smarter Decisions When You Don’t Have All the Facts, reads as a direct affront to the hubris of knowing something for sure. The insights to overcoming biases and examining outcomes are excellent, and the applicability to investing is paramount.4 While post-mortems on the outcome of a decision are – or should be – commonplace, Duke recommends the use of a pre-mortem to understand what might have driven a poor outcome, if it were to occur. Again, it ain’t what you don’t know that gets you in trouble, it’s what you know for sure that just ain’t so.

As a financial advisor and someone with domain experience in behavioral finance and portfolio construction, it would be easy to fall into a trap of absolutes. However, unlike a doctor performing a surgery – in which there’s the right way and every other way – investing is clouded by at least 50 shades of gray.5 The coronavirus’ varied downstream implications on the functioning of economies, markets, politics, and society allows for a good time to remember all that I don’t know.6

I don’t know if government bonds will provide the portfolio ballast and perceived safe haven in future periods of stress that investors have become accustomed to in the past. On one hand, those calling for rates to only move higher over the last few years have been way too dismissive of the “flight to quality” trade. On the other hand, it may be hard to argue both treasury and municipal bonds deserve the same “quality” moniker moving forward as the country increases its already large deficit considerably in an attempt to stabilize the economy. A number of questions come to mind: Is it absolute quality or relative quality that matters moving forward? Is it plausible interest rates go negative? What are the available alternatives to consider in striking a level of portfolio balance? Will diversifying ones diversifiers be of even more importance to protect against future shocks?

I don’t know if the stock market is going to be higher a month from now, a year from now, or five years from now. I know that regardless of one’s views, there is ample commentary to seek out in today’s news cycle to support one’s existing set of beliefs.7 More interesting, however, is to seek out the opposition’s commentary to gain a better understanding of the points of disagreement. Acknowledging the uncertainty in studying the dissenting voices leads to better decision making.

I don’t know if investing in distressed debt8 will outperform most investment strategies moving forward, but I think significant corporate debt issuance over the last 10+ years (read: levered balance sheets) coupled with a severe, even if potentially short-term economic downturn leads it to be a strategy worth prudently pursuing. As a strategy with high barriers to entry and also one with an ability to influence outcomes, a seasoned approach to accessing the distressed landscape may serve as a worthy complement to traditional assets in investment portfolios.

I don’t know if sequence of returns risk is truly appreciated by investors. The path of returns doesn’t matter from a pure compounding basis, but when cash flows are involved, the order of returns can have a magnified impact on portfolio value.9 I fear too many investors look solely to long-term capital market assumptions and average historical returns in financial planning with not enough contemplation for or acknowledgement of the singular path that will ultimately occur.

I don’t know when inflation will be the topic du jour in the investing community or when it will show up in markets. However, dismissing it entirely based on results from this recent economic cycle may be unwise. Reasons for a potential resurgence of rising inflation include, but are not limited to, record amounts of government stimulus, loans, and bailouts,10 a continued “don’t fight the Fed” approach that gets increasingly harder to “take away the punch bowl,” changes to supply chains as companies re-think globalization and sourcing of critical inputs, and potential currency debasement as a mechanism to “deal” with long-term obligations. It may serve investors well to review economic regimes with differing growth and inflation trends to ensure ownership of a diversified set of investments.11

I don’t know if it’s time to classify innovation12 as an asset class, but it may be worth considering. As history has guided, the next 10 or 20 years are likely to look very different than the past, but one constant should be continued digital transformation. The coronavirus pandemic should only bring forward current technological trends with also greater concern for health and the environment (food/water/climate), and sweeping changes to our education system.

I don’t know what to make of market structure today, government involvement, and what that means for future return expectations. Questions to contemplate include the following: How do government entities balance “whatever it takes”13 with moral hazard? If monetary policy wasn’t normalized in the prolonged recovery post the Great Financial Crisis, why would there be an expectation today it will be normalized anytime soon? Is it a certainty that taxes will only go higher as a result? Is the Federal Reserve’s purchasing of investment grade and high yield bond ETFs an exception or the future norm? As former hedge fund titan Leon Cooperman suggested14 recently, should a government backstop on the downside equate to lower market returns on the upside? With the five largest stocks accounting for a combined 20% of the S&P 500 market capitalization,15 does the “market” even represent the market anymore? All have implications to portfolio positioning and assessing risk and return moving forward.

I don’t know if the current crisis will change the way investors view their tolerance for risk and therefore necessitate better ways to assess it in advance of portfolio implementation. My guess is it will. It's not a great time to learn one’s willingness to take risk is less than originally thought as the market moves lower. Analyzing one’s willingness – and ability – to take risk, along with one’s composure, can be critical in designing a long-term investment program that finds the right equilibrium between attempting to realize long-term investment goals and being able to stick with the journey to get there.

It’s fashionable to have all of the answers. Some readers may even be turned off that I haven’t waxed poetically about a certain future outcome destined to occur as a result of the mix of variables at play here. I do not have a high degree of confidence in any one particular path playing out over the foreseeable future. Still, that doesn’t preclude me from having conviction in an approach or a set of strategies to consider; it just means I have to be measured in implementing it while continually assessing what can go right and what can go wrong. Referencing back to Annie Duke’s poker days, I don’t think there’s a hand here to go “all-in” on.

But again, it ain’t what you don’t know that gets you in trouble, it’s what you know for sure that just ain’t so.


Jason Mingelgreen, CFA
(212) 328-2465
[email protected] 

1 The term “green shoots” in the investment vernacular still refers to the development of improving or positive economic data in an otherwise challenging period. As used above, the term is a play on words and is not meant to indicate investment results or the state of the market.
2 Assuming here you’ve already finished Tiger King and Contagion. I frankly prefer The Office, although let me be clear I don’t condone Michael Scott’s behavior.
4 Hopefully, the applicability to investing is at least easier to see than a live sporting event these days.
5 Skipping this one on television.
6 My wife would tell you it’s a very, very long list. And she would be right (I know that!). This is a whittled down list of investment topics that I think are even more relevant given the current backdrop.
7 Confirmation bias is favoring information that confirms your already held beliefs and biases.
8 Broadly defined as purchasing out of favor debt obligations of companies or entities that are undergoing, or are likely to undergo, a restructuring or reorganization.
9 Most relevant to the years just before or after retirement – or around any set of expected portfolio withdrawals – sequence risk refers to the order and magnitude of returns impacting the longevity of capital. The math says compounding sequential annual returns of +4%, +12%, -14%, +9% equates to compounding the inverse set of +9%, -14%, +12%, +4%. However, from a dollar-weighted perspective, the timing of portfolio drawdowns matters when taking distributions.
11 A “quadrants approach” created via the intersection of a x-and-y axis (one axis, growth; the other, inflation) provides a framework for implementation based on economic regime: inflationary boom (high growth, high inflation); stagflation (low growth, high inflation), deflationary expansion (high growth, low inflation), and a slowdown (low growth, low inflation). The idea is that for each quadrant or regime, certain assets perform better than others.
12 A new method, idea, or product. Or disruption that changes people’s habits, workflow, or way of life.
13 Federal Reserve Chairman Jay Powell pledged to “use our tools to do what we need to do here.” 
15 Microsoft, Apple, Amazon, Alphabet, Facebook. Source: Bloomberg. As of 4/30/2020.


Past performance is no guarantee of future results. 

Asset allocation and diversification do not ensure a profit and may not protect against loss.