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Why future is unpredictable

The world of finance is like an ocean. You can never know everything that is there in it to know. You try to read and learn about it through books, blogs, articles and videos. But more you know, more you realize how little you know about it. There is an immensely complex system out there with innumerable thinking parts continuously interacting with each other. This makes it beyond the power of any human being to understand it in its entirety.

For a person to be able to predict the future of this complex system, will have to first list down all the variables that take part in the system. He then must come up with an algorithm that accounts for interaction of all these variables with each other. He also must collect complete and accurate data of all the variables to put it in the algorithm to be able to predict the future. No human being can claim to know all the variables that take part in the system; leave alone coming up with an algorithm that can incorporate their interaction with each other. We hardly ever have accurate data even of the known variables. And that is why it is humanly impossible to predict the future of this system.

None of us has any clue what is there for us in the future. Future could be better than the past. It could also be worse than the worst of the past. We do not know what inflation will be like in the future neither do we know what equity returns will be. All investment decisions are taken in the face of this uncertainty. The realization of this fact is probably the single most important thing in making investment decisions.

Investing is about future and we have no clue how it will be like. How do we go about taking investing decisions then? We follow time tested principles and practicalities of investing we have learned from the past. We follow the process. We avoid predictions though many people around us keep indulging in it. We practice rationality when everyone around us is taking decisions under influence of greed and fear. All this is easier said than done but this is the only sensible way to go about investing.

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