With a background of relative calm and less emotion in financial markets, it’s a good time to revisit the fundamental difference between risk and uncertainty:
“We try to think about two things: things that are important and things that are knowable”
So said Warren Buffet. Back in March I believed that three things were knowable and important:
1. We know that in the long run, if we start by investing where there is good value, we will achieve superior returns.
2. In the short run, we know we have to protect our investments against catastrophic falls.
3. History tells us that the US markets at current levels are subject to catastrophic falls (which, for the sake of argument, we can define as 50% falls, occurring over multiple years).
These have not changed. But they leave many questions unanswered such as:
· What is good value?
· How do you protect your investments?
· When are those catastrophic falls, and what do I do in the meantime?
Let me answer those from the bottom up:
· Don’t know, but in the meantime invest where there is good value and protect your capital values.
· Use a stop-loss systematically, with a liberal sprinkling of cash if you are losing sleep (yes, the latter is very subjective).
· Good value can be established by a raft of measures, whether at a stock or index level (and relative and absolute valuations will guide most of our asset allocation decisions).
Where you can calculate a value, you can also calculate the probability of an outcome, such as an outcome where you lose 10% of your investment. In contrast, uncertainty means you cannot calculate such a probability, and for many investors and fund managers this means they feel like they are flying blind – which is not comfortable.
Those answers might prompt another layer of questions, and do send those through. It is good value that immediately concerns me, as not every asset can be measured so precisely. Gold is a great example. No profits, no dividends. A wide variety of formulas have been devised to measure the value in gold, but I have found none consistently reliable (and am happy if you have one to pass over the fence).
Therefore if you buy gold you typically do so for one of two reasons:
Either because observation of behavioural trends and some technical analysis highlights an opportunity. There is obviously some subjectivity here, but what helps is a steady hand and staying calm under fire.
Or because you are a believer, and you have a permanent position in gold. I struggle with this, as long time readers know. Too much nonsense is written about gold being a safe-haven or inflation protection or a hedge against every possible outcome. It isn’t (more on that another time). Nor is it money.
Money is a medium of exchange. That means that if I want your chickens, but I only have shoes to give in exchange, which you don’t want, I give you money instead. For most of human history it was silver coins that were the dominant medium of exchange or money, not gold.
And in a crisis gold can be about as useful as a chocolate teapot e.g. from 1933 private ownership of gold was banned in the US. So much for its safe haven status or store of value.
There are many more pages which I could write on this, but for the sanity of us all, I won’t.
To the point. If you buy gold you are buying uncertainty, because there is no way to measure the probability of your likely success or failure. This is not just a problem for prospective buyers. It is also a problem if you want to know when you should sell e.g. if a share price moves too fast relative to profits or dividend growth, you can recalculate the probability of continuing success with your shareholding – but you can’t do this with gold, as there are no profits and no dividends. Statistically, you are flying blind. How do you overcome this considerable barrier?
If you are a believer, where rational discussion is out of bounds, you will just sit on it. It will go up lots, down lots, and in the longer term add little to your performance (I will present those numbers on another occasion). If you are a believer, and made a stack of money in gold this year, you will do nothing. The old adage “you never get poor by taking a profit” is anathema to you, at least when it comes to gold.
Year to date, physical gold is up 53%, and gold miners* are up 104% - more than doubled in just 10 months. If the average long-term return from equities is roughly 10% per annum, you achieved a return of between 5 and 10 times that amount in 2025 to date.
In contrast, if you had been observing investor behaviour and price trends a year or so ago you would have noted that the gold price trend was up, there was momentum, but there was no excitement. Gold trends tend to end with great excitement and a spike higher. With both of these being absent a year ago you could reasonably conclude that it was early in the uptrend. Conversely, in the last couple of months you could observe a spike higher in gold, lots of excitement, and a mass of media coverage – so you could equally reasonably conclude that it was late in the trend. The rational action is to bank 50-100% of gains.
The point is that you can’t precisely time the top or bottom for gold, but you can observe the traits which reveal extremes where you should consider either buying or selling. This works better with gold than many other asset classes, as gold stirs emotions like nothing else. It is more useful to observe investor behaviour than pore over spurious maths and myths.
Despite these signals, gold FOMO continued building in October, with iShares Physical Gold ETC being the most bought fund on the Interactive Investor platform, along with a Royal London Money Market fund. Apparently UK investors sold equity funds in record numbers between July and September. As one investment analyst put it:
“It is really unusual to see markets reaching record highs while investors are moving decisively for the exits across such a broad range of funds.”
The latter tallies with all the media talk of Crashes. This is where the difference between risk and uncertainty raises its ugly head again. Risks can be clear, evidenced by mathematical probabilities or historical precedent, or both. They are knowable.
It is the timing of those falls which is a random event, this is uncertainty. The stop-loss manages that uncertainty – it is not a perfect tool to manage uncertainty, but it is considerably better than having none at all.
The fact of a bubble centred on US equities is well established, and I have covered it to the point of exhaustion, as well as highlighting the downside risk – we don’t need to debate whether the risk of losing 50% is a Crash. SocGen came up with an intriguing performance number in the last week. If you exclude AI boom stocks from the S&P 500, since the launch of ChatGPT in 2022, the annualised rise in that index is just 5.4%, compared to 19.4% with the AI bubble stocks included, an extraordinary performance gap.
Turning to Blighty, by 5 votes to 4 the Bank Of England voted not to cut rates, not yet. It is reasonably clear that they will cut in December, perhaps not wanting to muddy the political waters between now and the Budget. The speech from Rachel Reeves earlier this week seemed eminently sensible, which is a relief because she has been very poor until recent days. The UK government has too much debt, and the country is living beyond its means day to day. More revenue is needed to pay the interest on the debt (so income tax must go up), and government expenditure must go down (benefit recipients must take a hit too). Those two will help considerably in the short term. Action to encourage growth in the longer term is essential. And if she wants to claw back lost ground she must reverse the inheritance tax hit on farmers and small businesses, both vital to the economy, because the tax grab to come into effect in April 2026 smacked of spite rather than sensible fiscal policy.
If she can’t do these things, the Labour government might as well pack their bags now. Anything less might appease the bond markets (which is important), but their collapse at the next general election will be assured. We should all keep fingers crossed because if RR doesn’t get this right we are all losers.
Nonetheless, the UK financial markets are tending to optimism ahead of the Budget. The FTSE 100 has performed better than most global indices in recent days, with only Brazil and China doing better. Japan, India and the tech focussed NASDAQ were each down 2%.
It was disappointing that UK smallers were down just less than 2%, and the FTSE 250 not much better. Weaker sterling helped the FTSE 100 global dollar earners, but this didn’t filter to the more domestic indices. Global asset allocators will undoubtedly build their exposure first and foremost through the FTSE 100, but it would be helpful for the bull case if there was evidence of the same in mid and small caps. In contrast, Chinese smaller companies have been well supported in recent days, which we would expect to see in a building uptrend – but they are very volatile and can reverse quickly.
Gold, silver and oil funds rose 1-2%, while uranium and uranium miners were smashed, down 8-20%. The next week or so will be interesting for gold and silver. Though I expect the correction to persist from the 20th October peak, I am prepared to be wrong.
We have got through a week with no mention of The Orange One. Long may it continue.
*Obviously you can put a valuation on gold mining shares, as they make profits and pay dividends, and they still look cheap. But their prices are dictated by moves in the gold price. Gold miners remain on our shopping list even after banking 100% gains in 2025.