Donald Rumsfeld had a remarkable ability to convey complex ideas with clarity and simplicity. Though not everyone has appreciated his insights, he remains a figure of considerable intellect, even earning the nickname “Ronald Dumbsfeld” during his time in the Nixon administration.
Such criticism never deterred Rumsfeld. He once noted, “If you try and please everybody, somebody’s not going to like it.” In a world rife with deceit, this type of sharp perception is certainly valuable.
After a long silence following his departure from public life, we were pleasantly surprised to find his annual letter to the Internal Revenue Service published recently. Within it, he shared some thought-provoking insights.
Rumsfeld expressed concern over the intricacies of the tax code: “The tax code is so complex, and the forms are so complicated, that I know I cannot have any confidence that I know what is being requested and therefore I cannot and do not know, and I suspect a great many Americans cannot know, whether or not their tax returns are accurate.”
He added, “This note is to alert you folks that I know that I do not know whether or not my tax returns are accurate.”
Unknown Unknowns
This statement encapsulates his point well, reminding us of a significant concept Rumsfeld coined, one that provides greater insights into business and investing than many traditional education programs.
“There are known knowns. These are things we know that we know,” Rumsfeld explained during his tenure as Secretary of Defense. “There are known unknowns. That is to say, there are things that we know we don’t know. But there are also unknown unknowns. There are things we don’t know we don’t know.”
For investors, known knowns might include established facts like historical averages for stock valuations. These facts serve as a beacon for investors, guiding them back on course when necessary.
Known unknowns, beyond the complexities of IRS forms, also encompass the uncertainty of market fluctuations. We can’t predict whether Google shares will surge or decline; we can only react to the current climate.
Recognizing both known knowns and known unknowns is vital for successful investing, as it aids in evaluating risk and formulating management strategies. Nevertheless, no strategy is infallible…
The Next Big Crisis Moment You Can Bank On
Especially when unknown unknowns loom on the horizon. These unforeseen, “fat tail” or black swan events remain unpredictable—situations we can’t foresee.
Take, for instance, the assassination of Archduke Franz Ferdinand of Austria. On June 28, 1914, Gavrilo Princip, along with a few accomplices, carried out an act that nobody else anticipated. His actions unleashed the latent tensions in Europe, ultimately leading to the devastation of World War I.
What might the next unknown unknown be?
Will it resemble another Lehman Brothers collapse, the events of 9/11, or the Fukushima disaster? Could it stem from geopolitical tensions in China, Ukraine, or even a crisis in Puerto Rico?
By nature, we remain uncertain. As mere mortals, we cannot foresee the headlines of tomorrow. However, we do possess known knowns and known unknowns to help guide our decisions. We understand that another crisis is inevitable, and we are certain it will be significant.
You can bank on it.
Sincerely,
MN Gordon
for Economic Prism
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