But What If We're Wrong? [Book Review]

In our annual letter to investors this year, we discussed the difficulty of evaluating past decisions for validity without contaminating the assessment with present knowledge of the outcome.

Over time, careful consideration of what can go wrong with an investment is critical to effective risk management and long-term results, yet it is perhaps the hardest thing to do.  The reason for this is that what must be ascertained are the negative spaces and gaps in your thesis.  What we must effectively answer is the question, “but what if we’re wrong?”

The shortcut typically employed is to point to the embedded forecasts; by definition these are not known and thus potential sources of error.  One then allows for some range of possibilities...