One of the more annoying clichés of the past year has been ““The markets hate uncertainty.” You can always tell when you are listening to an empty-headed pundit when they trot out that old saw.

This morning, I have a Bloomberg column on that exact subject, titled “Kiss Your Assets Goodbye When Certainty Reigns.” (or, if you prefer, the older noir version of Bloomberg).

Here is an excerpt:

When Certainty Rules

Recall the dot-com era, when everyone knew that profits no longer mattered. Uncertainty seemed to be banished. An epic crash followed.

After the Internet implosion, the opposite extreme was operational: Profitable, debt-free tech companies were being traded for less than book value. In a few rare instances, they were being sold for less than cash on hand. Investors had become certain that a dollar was worth only 75 cents.

There was little uncertainty heading into the March 2009 stock-market lows. Almost everyone was sure the world was falling into the abyss. In that massive and indiscriminate selling, it seemed almost certain that no one was ever going to buy another house or car, or send their kids to school, or for that matter, clothe or feed them. How did the consensus work out in that instance?

No Reward

When we discuss uncertainty, what we are really discussing is risk. All unknown outcomes contain risk, and therein lies the possibility of loss. Risk is inherent in the concept of uncertainty. However, anyone looking for performance must embrace risk, for without it, there can be no reward.

Uncertainty is what makes alpha, or market-beating gains, possible. Smart traders know that uncertainty is where the money is. No uncertainty, no risk; no risk, no possibility of outperformance.

Since July, when the Era of Uncertainty began, the Morgan Stanley Cyclical Index — those businesses most closely tied to this uncertain economy — is up 26 percent.

Want some certainty? Go buy yourself Treasuries. You can pick up a very lovely two-year bond yielding 0.41 percent. (Good luck charging two and 20 on that!)

You can read the entire thing here (or here).

I will be discussing this on Bloomberg TV with Betty Liu at 9:15 am; then on Tom Keene’s Radio show right after.


UPDATE: November 10, 2010 3pm

Hey, its the 2nd most popular article on Bloomberg !


Kiss Your Assets Goodbye If Certainty Reigns
Barry Ritholtz
Bloomberg, Nov 9, 2010 9:00 PM ET

Category: Investing, Markets, Really, really bad calls

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

33 Responses to “The Uncertainty Myth”

  1. mathman says:

    Or, as Hedley LaMarr put it in Blazing Saddles:

    (Think of corporate world as the bad guy gang, while Hedley may be the embodiment of the FED):

    Taggart: What do you want me to do, sir?
    Hedley Lamarr: I want you to round up every vicious criminal and gunslinger in the west. Take this down.
    [Taggart looks for a pen and paper while Hedley talks]
    Hedley Lamarr: I want rustlers, cut throats, murderers, bounty hunters, desperados, mugs, pugs, thugs, nitwits, halfwits, dimwits, vipers, snipers, con men, Indian agents, Mexican bandits, muggers, buggerers, bushwhackers, hornswogglers, horse thieves, bull dykes, train robbers, bank robbers, ass-kickers, shit-kickers and Methodists.
    Taggart: [finding pen and paper] Could you repeat that, sir?

    and later:

    Hedley Lamarr: Men, you are about to embark on a great crusade to stamp out runaway decency in the west. Now you men will only be risking your lives, whilst I will be risking an almost certain Academy Award nomination for Best Supporting Actor.

    Good luck with “democracy” and “capitalism” going forward . . .

  2. Petey Wheatstraw says:


    Some funny shit, there.


    BR’s post:

    Want some certainty? Find a way out of the fiat currency/fractional reserve banking/debt/money supply quagmire. Find a way to distribute income more equitably, without trampling on anyone’s “right” to own and manipulate the whole enchilada. Stop market manipulation, generally. Make investing more than a straight-up gamble. Enforce the law. Accept and allow the fact that there will always be poor and/or underproductive people, and that healthy and productive people eventually get old or ill and become a cost to greater society, and that a healthy society can afford to bear the cost of these people without subjecting them to abject poverty.

    Short of that, it’s all uncertainty.

  3. call me ahab says:

    I was certain Wade Phillips would be fired after Sunday’s game-

    how’s that for certainty?

  4. BR,

    you mean ‘certainty’ as pertaining to a specific ‘Market’, yes?

    as in, “”The Market” is a Market of Markets”, right?

    or, differently, There are Market segments.

    the E-Z ex., during the dot.bomb-era, peep were certain that Au (sub-U$D 300) was, merely, ‘a barbarous relic’, hardly, along with its ‘Mmod friends, an ‘Investment Thesis’ …

  5. DC says:

    BR –

    Great job on Bloomberg website and TV. Feel free to repeat your recommendations and expound on your theses for the next few months.

    Not entirely sure I’m on board with the concord-grape necktie. Perhaps with time….

  6. druce says:

    Friction (entropy) is the enemy of a car, but without friction (entropy) it doesn’t go anywhere.

    “You pay a very high price in the stock market for a cheery consensus” – someone said in ’79, when BusinessWeek had the famous death of equities cover.

  7. dead hobo says:

    BR said

    One of the more annoying clichés of the past year has been ““The markets hate uncertainty.” You can always tell when you are listening to an empty-headed pundit when they trot out that old saw.

    You’ve only been noticing this for a year? I’ve been hearing it for at least as long as you’ve promoted magic charts (defined as the belief that the future is pre-ordained and all you have to do to know what is going to happen is to find a chart from a bygone day that matches what you think is similar to today. Whatever happened then will happen again. This also assumes that a magic chart would not have worked for the base comparison event as that was a unique event -or- it was just a pre-ordained reply to a universal set of requirements that have always happened and always will)

    To return to my point: You miss the point of the remark. It has nothing to do with the definition of risk and the behavior of markets. “uncertainty” = the lack of a sell story. A few months ago certainty was ‘green shoots.” A few weeks ago it was the promise of QE2, as opposed to the fact of QE2, which will undoubtedly create new certainties, or sell stories. The sell side promotes certainty because uncertaity is bad for business. Right now, we are between certainty sales pitches, which may otherwise be described as “why you need to be in the markets now”.

    As I see it, all big sales happened a couple of years ago. All recent buys were from asset managers using OPM, hopium induded pension funds, HFT churn, 401k payroll deductions, and the occasional day trader. It would take the end of the world or another flash crash to bring the markets down appreciably. HFT and Fed cash has primarily supported the markets of late. QE2 will send them skyward once again. Current policy wonks bad mouthing QE2 are creating a window of opportunityby promoting uncertainty. Soon ‘certainty’ will appear again and a new sell side story will be used to rope in new buyers.

    Actually, I think the economy is starting to improve. That, with QE2 will create a new buy and hold period for a couple of years, althouth there certainly will be a few big dips along the way.


    BR: What do you mean by magic charts? You keep saying that, and to tell you the truth, I have no idea WTF you are talking about.

  8. Bruman says:

    Good stuff, Barry, as usual. The academic in me has some niggling points to add…

    Some of the financial types like to make a distinction between risk, which is quantifiable, and uncertainty, which is more or less unquantifiable. And yet, when you make a buy/sell decision, it doesn’t matter whether you are accounting for risk or uncertainty, either one can whack you, so even if uncertainty is unquantifiable, it nevertheless gets quantified (not necessarily appropriately) when a transaction involving a price takes place.

    The consequence of risk and uncertainty in the market is that assets need to be discounted appropriately. So there is some truth in the idea that “markets hate risk/uncertainty” but the statement is mis-specified: what it really means is that “markets hate when risk/uncertainty increases,” because when they increase, asset prices drop.

    But of course, asset prices dropping is just the overture. If risk is higher, then the reward needs to be higher too. So if the only thing that has changed is the perception of risk/uncertainty, then the result is two things: 1) asset prices drop as the perception increases, and 2) subsequent returns are higher in compensation for the increased risk.

    So risk is this two sided coin… it can whack your returns when it increases, but it can be a source of increased returns thereafter.

    All of this assumes, of course, that the only thing that’s changed is the perception of risk. Usually risk or uncertainty increases in response to some kind of real world event, and so the key (as I’m sure you and many of your readers know) is to figure out if the percent decrease in price is commensurate with the real-world change in expected cash flows.

    Anyway… the problem with “markets hate uncertainty,” is not that it is actually wrong, but that it is only half (or less) of the story.

  9. rdhall3637 says:

    I could not agree more!! Markets reverse from steep selloffs when uncertainty is at it’s highest point! “Blow your face off” rallies rocket off the bottom, which then often turn into fading uptrends that last months! There is always uncertainty, that’s the point. Uncertainty = risk, and risk = potential for profit or loss. The best opportunities come when the night is the darkest. However, if you are trying to make investment decisions based on the “level of uncertainty” in the market, good luck!!

  10. safe haven says:

    Great Piece BR. Thanks. You want risk ? 1985 or thereabouts, CHF traded close to 2.85 to 1$ U.S., today the same 1$ costs about .97 cents CHF; Where is the Risk today in what some argue is an over-valued Swissy vs the $ when you consider the top down balance of payment surplus fundamentals in Switzerland, along with other facts such as the country having one of the higher global savings ratios and, being an extremely competitive economy globally, in an environment where the shoe or two to drop will be more QE from the Fed and or devaluations from others ?

  11. KentWillard says:

    I guess uncertainty enables arbitrage, asymmetrical information, and all that. But quite a few people also bet wrong on the uncertainty. And given too much uncertainty, people just stop investing.

    Imagine a world like Chevy Chase reported as the anchorman of SNL: “Stocks today were unchanged. Everyone is happy with what they own.”

    ps: I definitely prefer the Bloomberg noir. Why did they change it?

  12. dead hobo says:

    dead hobo Says:
    November 10th, 2010 at 9:52 am

    BR: What do you mean by magic charts? You keep saying that, and to tell you the truth, I have no idea WTF you are talking about.


  13. rip says:

    Uncertainty? For insiders? You’ve got to be kidding.

    And commodities? Yeah small players got burned. That’s what the commodities market is all about. Duh.

    But some walked away with billions. Uncertainty?

    The elites have been controlling the markets for some time. There’s no uncertainty there. You’re a Manhattan guy. You surely know that.

  14. phb says:

    How about this for a cliche’d “certainty”: Capital is a coward.

  15. BR –

    I agree with your position that investors profit from uncertainty in outcomes, however, that is only true if the investor picks what then becomes the certain outcome…

    In the environment today, with the U.S. government controlling more aspects of private enterprise than in a generation, and with the Federal Reserve essentially monetizing a portion of U.S. government debt, I would argue that “uncertainty” in government policy is leading to more uncertain outcomes which by definition will be more unpredictable and may as a result have higher payoffs, however, for ordinary people and non-financial businessmen these uncertain and capricious policy-making has resulted in risk aversion (ie, less people in real world business who participate) ….

  16. Livermore Shimervore says:

    This TIRED uncertainty biz in general makes me head explode!!

    A decade of CERTAINTY on interest rates (low), taxes (going lower), wages for labor (fixed), union participation (declining massively), worker productivity (Cal Ripken like), credit flow (surging), the DOW (up to the nosebleeds), influx of foreign cap (gushing), Fortune 500 offshore revenues (swelling like the north shore), uniterrupted GDP growth (bulletproof), inflation/deflation (non-existent)….and what did we get?


    ZERO job growth. NEGATIVE wage growth. NEGATIVE household net worth.

    I got news for you empty-headed pundits and right wing pols, companies aren’t hiring because they weren’t hiring before! The Too Stupid To Fail crisis simply forced them to figure out that they can make more with fewer workers. Now that the securitization of the kitchen sink aka the airbag we were standing on, has been defalted err I mean deflated to the concrete ground we really should get beyond this “uncertainty” drivel. Things are very certain: The Repubes aren’t raising taxes, neither dimwitt party has any idea what to do in moving the unemployment needle back to 5%, corporations are just fine with 9.6% unemployment and will continue to sit on cash to spend on future acquistions.

    R.I.P. (yet another victim to Palin on her white Laffer horse):

  17. Lemme tell you a story about “uncertainty”….

    Remember the Bush tax cuts? The ones they put in in 2001 and 2003 – but they didn’t really have enough votes so they went the “Budget Reconciliation” route which ensured limited debate, no amendments, and a simple majority vote – all in exchange for the proviso that anything passed under “Budget Reconciliation” has to expire at the end of 10 years and so, by design, is only temporary.
    “That’s OK”, the thought went – at some point in the 2000s before the temporary period expired, the Republicans would have enough votes to pass the tax cuts the right way and make them permanent. (They were going to do so right after Labor Day 2005, but then Hurricane Katrina happened, and it was decided that would be unseemly to give the uber-wealthy a huge personal tax break right in the middle of a national emergency – and then the opportunity never presented itself again, oh well…)
    Anyway, the take-away of the story so far is that the Republicans, as a matter of choice and strategy, decided to pass temporary tax cuts.

    Then, around 2004 or so, President Bush and the GOP leadership suddenly started talking about “uncertainty” – the fact that the tax cuts were only temporary added a tremendous “uncertainty” to businesses – which is a bad thing. And the tax cuts needed to be made permanent so as to remove businesses from having to face this terrible “uncertainty”. Not a word about fiscal policy and the economic future of a country faced with huge deficits. Not a word about how the fact that the temporary nature of the tax cuts that created this terrible “uncertainty” was solely caused by a deliberate political maneuver by the Republicans – only that there was “uncertainty” and that was bad and we may need to mortgage the financial future of the country in order to alleviate it – that evidently the “uncertainty” is so bad that we should project endless deficits going far out into the future if only to protect our businesses from having to face it. The sad thing is that no one in the media ever called them on it.

    So when I hear the “uncertainty” argument now, all I think of is crass oportunism, cynicism, and fear-mongering. If you can’t get something you want, make it temporary, and then tell people the fact that it is temporary is such a great evil in and of itself that that and that alone is a reason it has to be made permanent. It’s a great distraction from actually considering the substance of issues – and it appears to be the GOP way of doing things. I’ll pass on any argument that uses “uncertainty” as its centerpiece as I know that its really just a bogus way of creating an argument based on fear and immediacy rather than consideration of actual facts.

  18. HarryWanger says:

    Worst cliche by far IMO is: the markets look forward six months. Conveniently trotted out when the market goes up but is never explained and completely idiotic when its near its apex.

  19. Mannwich says:

    I honestly think there are those who won’t be truly happy until all tax rates are zero and we literally have a full-fledged banana republic with walled off portions of the country for the uber-wealthy.

  20. VennData says:


    DISCUSSION POINT: What is the overriding characteristic of non-HFTraders that must be overridden to implement the Ritholtz Uncertainty Principle …if you’re not a computer?

    CONCLUSION : Don’t listen to people who have a vested interest in bad mouthing America. There’s a quiz at the end.


    QUIZ: Who might that have been in early 2009?

    SOLUTION – TEACHERS EDITION: You not only “listened” …you enshrined their situational logic, their ridiculous hyperbole, their half-baked “arguments,” their a-historical claims, their fuzzy math, and their out-in-out lies.

  21. S Brennan says:

    Dunno Barry,

    It could be the real money is made by creating certainty in the minds of normal folks going about their daily lives….hence the talking heads with their river of drivel.

    These normal folks “invest” only because a fair and decent pension system has been broken beyond repair and is unavailable to them. When I was a kid, none of my friends parents played the stock market, now all my compatriots do.

  22. Seth says:

    Thanks, Barry! This vapid talking point has been bugging me too.

  23. Arequipa01 says:


    Is AMZN insane? Or are the Elites signaling that they want their favorite hobby reconsidered?

    h/t IncaKolaNews

  24. AHodge says:

    the “uncertainty” blah blah–meaning Obama policy uncertainty– we have been fed 60 hrs prime time/ week from “investment” shows is bogus.
    If Kudlow etc were actually “buying their own bullshit” which i doubt, they will need more salary to pay for losses.
    But the market dislikes real uncertainty–by which i mean like Pre-iraq war or something serious.

    take your point about excessive complacency setting up for a fall,
    But thats not much different than optimism setting up for a fall. It was the optimism or relative certainty that got you to the peak in the first place.
    Then there no place to go but down.
    For serious risk geeks there is the VIX, AKA the fear index. As the Najarian boys will tell you, when markets fall, the VIX rising high enough makes it too expensive to short more via option. VIX of 23 said to be a dividing line?
    the VIX is now 18.9
    in optimism territory.
    but curiously there are forward VIXes, and they are now much higher
    record steep? 26 or about even 3 months out. market could be pricing calm before storm.
    i bet against that. I just did large calendar VIX spread. Sold Dec 24 strikes bought Feb. Almost unbelievably mkt pays ME a net $1.18 per contract to sell the Dec and buy the Feb? my risk is forward curve goes even steeper, i like that.

  25. DC says:

    Barry hit a nerve (which needed hitting).

    Several excellent analyses today, but I gotta go with Ethel-to-Tilly at 11:46am FTW.

  26. rip says:

    @ethel: What a nice insider’s insight.

    Thanks. Nuf said.

  27. ToNYC says:

    “Wall Street has a sweet tooth for such investing maxims. They infect the trading community like influenza in December. Repeat mindless dictums ad nauseam, and they soon become the accepted wisdom. ”

    I like the way you think about infection..easy going in, tough to get out… but you seem to have left out that “Talking One’s Book” is the social animal’s perpetual attempt to pump up a flaccid logical narrative, and hive or collectively fantasize what later looks like the stuff of Certainty. If it weren’t for ignorance and paradigmatic blindness, we’d have a bit more Clarity that appears to be missing for the crowd.

  28. Bruman says:

    Regarding certainty, I like Michael Mauboussin’s take on things. What you are describing as “certainty” is really what he would call “a breakdown of diversity (of opinions).”

    The key question is whether the certainty is warranted or not. For example, it’s reasonably certain that Congress will be seated next January and reflect the results of the recent election. That certainty is basically warranted. On the other hand, the certainty that cash flow didn’t matter in the dot-com run-up is an unwarranted certainty. In both cases, you have a breakdown of diversity of opinion, but it’s only in the case where certainty is overstated that it becomes dangerous.

    How do we know one from the other, though? One clue would be to figure out how dissenting voices have been excluded from the investment conversation. Have they simply been stampeded into silence, or have they withdrawn of their own accord. While not perfect, this may give hints as to whether “certainty” is warranted or not.

  29. JackOtter says:

    Great column Barry. The related observation that pundits love to offer is that the markets have “very little visibility right now.” As if everyone’s crystal ball was crystal clear in 2007. Or March, 2009, or any other time in market history.

  30. This system is going to collapse under huge debt obligations. The banks are still insolvent and they are trying to take civilization with them.