“Never tell me the odds!”
That’s what Han Solo yells at C3PO as his ship flies into an asteroid field in “The Empire Strikes Back.” With Han Solo returning in the new Star Wars movie, a lot of these old movie lines are coming back.
Han Solo doesn’t want to know the odds of success because that information might crimp his swashbuckling style—which is pretty reckless. It makes for an entertaining movie, but it also has relevance for investors.
There are a lot of times where we can’t calculate the odds—situations that are impossible to predict but have world-changing effects. Technological innovations–like the widespread adoption of personal computers in the ‘80s and ‘90s, or electrification in the ‘20s–can re-make society. In hindsight, these radical changes can be rationalized. But no one predicted them.
Risk, on the other hand, can be calculated—like rolling a pair of dice. Each set of numbers is distinct, and the probability or rolling one combination or another is determined by a mathematical formula. I don’t’ know what the next roll will be, but can be pretty certain how many times 7 will come up in 100 rolls—about 18.
Investors have to deal with both risk and uncertainty. In the short run, business is risky. Sales may rise or fall, but probably will fall within a range. In the long run, life is uncertain. Technology or social changes or geopolitics can insert themselves anywhere. Sometimes managers need their own swashbuckling style to adapt.
Han Solo doesn’t want to know the odds because he doesn’t want to doubt himself. But sometimes, you can’t know the odds. You just have to improvise.
Douglas R. Tengdin, CFA
Chief Investment Officer
Leave a comment if you have any questions—I read them all!