VALUE INVESTING
Ignorance Is Knowledge

By Stephen Bland (TMFPyad)
March 19, 2004

'Ignorance is Knowledge' is one of my portfolio of aphorisms that annoy many people, which of course is why I come up with them. Smug? Definitely. Don't knock smugness, it can be comforting, at least for the smugger if not the smugged.

At first sight my statement might appear to be an oxymoronic. Applied to life generally indeed it is so. How can ignorance be knowledge? Load of old tosh surely. And I wouldn't disagree. But we're not talking life, that is far too trivial a subject, we're talking here about high yield portfolios (HYP) and how to succeed with them.

In Zen, you might meditate sometimes by considering paradoxical statements known as koans to cut through what others consider to be rational thought. These koans can help to achieve sudden enlightenment, known as satori. Ignorance is Knowledge is a financial koan for Zen-based HYP investors. It's definitely enlightening, particularly for the wallet, although that is not a part of the body that true Zen practitioners would consider important.

It took me years of watching investors and markets to come to the conclusion that the more you learn about shares the less you need to know. I and other experienced value trading investors can evaluate the merit of an attractive share in a handful of fundamental figures and a few words. Any more is less. For HYP shares even the value investor's brevity is prolix.

Beginners though don't always see it this way. They think often that you need to know great volumes of information about a share to assess it and cannot always see that too much knowledge is overanalysing, which actually impedes the power of assessment rather than aiding it. For once you have tried to gain too much knowledge, it may be that your judgement becomes impaired by emotional involvement, which is fatal for value players.

A characteristic of some HYP investors is the feeling that somehow they can divine the future of the company. They look at the products, the markets and so on try to consider where those will be in ten or twenty years. This sort of analysis is completely futile. Worse than futile, it may affect adversely the shares selected.

The truth is that good HYPs are mind numbingly simple to construct. You don't need to consider anything about the future at all. All you need to find are higher yielding companies, usually large caps, that are the most capable of increasing dividends as far as you can tell from current data. This means looking for value fundamentals like low debt, high cover and so on. Along with that you need to diversify sectors, which will mean almost certainly having to give something here and there in the fundies as a trade off. And that is it.

But more than that, you have to realise that you are in complete ignorance of the long-term future, either of any individual share or of the economy as a whole. This the subject upon which you need to meditate if you are one of those who think you can predict something. Because actually realising that Ignorance is Knowledge, ignorance of the HYP future, is empowering. If nothing else it saves all that agonising over the market for left-hand widgets in Mongolia in 2020 or whether the EU will enlarge to include Australia.

It may sound paradoxical to ignore a company's prospects considering that you intend to hold the shares for as long as eternity in some cases. But as in Zen, HYPs involve a number of ostensible paradoxes that by transcending what others might call rational equity thought, you actually achieve sudden enlightenment.

In the demo HYPs I run on TMF, I don't think I gave a moment's thought to the long-term future for any of the shares. Because I don't know. But crucially, I know that I don't know. And realising many years ago that I know this was indeed enlightening.

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