In investing, the devil you don’t know is often better than the one you know

The greatest trick the devil ever pulled was convincing the world he didn’t exist

Hi,

Have you ever heard the name Keyser Söze?

If you ask ChatGPT or Perplexity to name the greatest criminal minds of fiction, this name will appear high on the list.

The character is from the 90s movie The Usual Suspects. Watched it the other day for a movie night with my girlfriend Emilija. The quote, from one of the characters telling the maybe-myth of the criminal underworld lord, stuck in my head.

The greatest trick the devil ever pulled was convincing the world he didn’t exist.

Keyser Söze operates without anyone knowing who he is or whether he exists or not, to the confusion of law enforcers.

There is a similar saying “Better the devil you know than the one you don’t”.

In ambiguous situations, we tend to prefer dealing with the one we know the details of, even if highly unpleasant.

When it comes to investing though, if you want to succeed, it is better to get comfortable with uncertainty.

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In behavioral psychology, the tendency to prefer known risks over unknown risks is called ambiguity aversion.

The typical case is when you are facing the decision of whether to cut a losing position or not.

The risk of keeping the position is known. The worst that can happen is that you lose the invested money. If you are a responsible investor you already accepted this possibility when you made the investment, which makes keeping a losing position even more comfortable.

If you close the position, materializing the loss, and the price then turns and makes a profit instead, you miss the opportunity.

Would you rather deal with knowing you lost your initial investment or knowing you lost part of your investment and missed out on profits?

For most people, the obvious answer is to keep the investment.

As we know, very successful investors are the minority. So we need to not behave like the majority. (Writing this got Green Day stuck in my head)

My personal saying and investing mantra is “When in doubt, get out”.

On top of that, I recommend realizing that if you already accepted that you are willing to lose your investment since you are investing responsibly, cutting a loss should be a nonissue. If you cling to a losing position maybe you didn’t really accept the potential negative outcome.

The devil you know is attractive from a position of scarcity. When in a position of abundance, you know that there are always opportunities.

I like to have a curious and exploring approach. Mistakes are learnings. Each one makes us better decision-makers.

I create investing rules for myself that act as risk management. Coupled with principles it turns the market into a playground to explore, play, learn, and improve. Fun!

In the markets, better the devil you don’t know. It might not be a devil at all.

Have a good one,

Chris

Thank you for reading! :)

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