Why it’s so hard to make money from the unpredictable
Today, the Wall Street Journal carried a story about how mom and pop investors can profit from “black swans”—those seemingly impossible events that, when they arrive, completely disrupt the investment landscape.
The term was made popular by Nassim Nicholas Taleb in The Black Swan a few years ago. Then, the financial crisis happened, and now, Taleb is one of those rare authors who would actually prefer to do fewer interviews and book promos than he does now.
Black swans are supposed to be inherently unpredictable. They’re the “unknown unknowns” of the investment world—extremely rare events that most consider impossible if not inconceivable. We all worry about tax reform, and then, boom, a few planes hit major American landmarks. (Which happened.) We all worry about Iran getting nuclear weapons, and then, boom, a nuclear power plant goes Chernobyl in Pennsylvania. (Seems improbable, but that’s the point.)
Once a black swan event happens, all of that other little stuff you normally care about as an investor—whether it be valuations, interest rates, or profit margins—ceases to matter, or at least matters much less. And as we discovered during the financial crisis, hitting a high-impact, improbable event results in almost all traditional asset classes losing value.
But in 2008, a hedge fund managed by one of Taleb’s collaborators didn’t lose money—in fact, it more than doubled. Today, mutual fund companies are opening their own funds, for investors who can’t afford a hedge fund, dedicated to protecting against or profiting from black swans. That’s not surprising. Mutual fund companies always come up with products after they would have been most useful. But now that these guys are around, do they ever make sense to invest in?
Predicting a black swan.
“Predicting” a black swan is an oxymoron. So how can investment strategies be tailored to do it? In his book, Taleb advocates putting the overwhelming majority of your assets in something extremely safe, such as Treasury bonds, and then taking a flier with the last 10%.
For example, after putting 90% of my portfolio into Treasuries, I might put the last 10% in a few biotech stocks. If one of them finds a cure to cancer—thereby hitting a positive black swan—I get rich, even though I had relatively little money invested in it. If they don’t, the worst I can lose is 10% of my portfolio.
More complicated strategies, used by some of the hedge funds that espouse Taleb’s strategies, involve buying out of the money put options.
Without getting into the strategy itself, basically the funds only make money if there are extreme market losses on whatever asset they buy the option on. Because the market thinks those events are unlikely, the options are very cheap. But over time, if the event never happens, a fund can slowly bleed to death as it waits in vain for luck to strike.
Practically, for a mutual fund like the Pimco Global Multi-Asset fund, which the WSJ article cites as a black swan fund, you get a fund that charges a 1.41% expense ratio with a strategy that you’re not going to really understand. The managers say that their hedging strategies will limit your downside risk in any one year to 15%, but isn’t the whole point of a black swan event that you don’t know in what magnitude and in what way the swan will strike?
Lessons from the last black swan.
Which brings us to the event that rocketed thinkers like Taleb to prominence—the collapse of Lehman Bros. and the financial crisis. Between Lehman’s collapse and the March 9, 2009 market trough, the S&P 500 lost 46%. That’s pretty bad and really devastating to someone who needed that money soon and had most of their money in equities.
But your average retiree didn’t (or at least shouldn’t) have most of his money in stocks. Using the oft-used rule of thumb to put your age in bonds, a 65-year old would only have 35% of his money in stocks. Which means, his portfolio right now might be down 15% to 20% from that peak. Not good, but not devastating either.
Sure, another crisis is still possible, but it seems that crises of the most recent variety, which wipe out a large, but manageable, amount of wealth, are best dealt with after the fact rather than beforehand. If you happen to be the unlikely victim of a huge, unpredictable event, it’s much easier to reduce your spending, delay retirement, or take a part-time job than it is to try to run an investment strategy that will eliminate the bad event’s effect.
Take Peter Schiff, for example. His prediction of the 2008 financial crisis was dead on, but his clients lost 40% to 70% of their money.
Why? Schiff was right about the crisis, but wrong about its effect. He thought the dollar would lose its value and foreign stocks would stomp stocks here. Instead, the dollar soared, as investors poured into what they thought was the last safe investment out there, and his clients lost a ton of money. Of course, we’re not out of the woods yet, but Schiff’s mistake shows how hard it is to get bets on unlikely events correct.
So in my view, black swans are just something we have to live with. It would be nice to “beat them” by anticipating and profiting from them, but that’s probably impossible. It would also be nice to limit the downside risk of a black swan event, but there are so many ways in which such an event could affect you that limiting your downside is also probably impossible.
You can invest wholly in Treasury bonds, but what if the “black swan” is the dissolution of the American government? You could invest in gold. But what if the black swan is the discovery of a way to turn lead into gold?
As long as black swans—and their effects—can’t be anticipated, the best strategy is to remain flexible and quick to adapt when it occurs, not to try to predict the unpredictable.
{ 97 comments… read them below or add one }
Hey great article Pop, Does Taleb conclude in his book that black swans can’t be anticipated? Do you think the recent oil spill was a black swan because I think Taleb said it wasn’t a Black swan event during his interviews? BTW, I think you should make a Black Swan Pop art piece
Hey, thanks. Yeah, pretty much the entire crux of the book is that we can’t anticipate black swans, by definition. Instead, with hindsight we try to identify signs that could have helped us foresee the event, according to Taleb, when actually there was really no way we could have seen it coming.
I’m not sure if the oil spill measures up…in the end, while it was devastating to BP and might have a longterm impact on the Gulf, it doesn’t seem to have had the same level of impact as the market crash in 1929, Sept. 11, or the financial crisis.
Also, good idea for the pop art. I need to get some new images going. Thanks for writing!
So in my view, black swans are just something we have to live with. It would be nice to “beat them†by anticipating and profiting from them, but that’s probably impossible.
We disagree, Pop. But I am happy to see you writing about this topic. Anything written about it gets people thinking about it and that always advances the ball a bit.
Your note about Schiff is wonderful. I believe that the reality is that some things can be predicted easily and some things can be predicted not at all One of the first things that we should do in learning about investing is dividing different things into the two different categories. Schiff got the easy thing right but then got too proud and attempted a prediction of something that cannot be predicted and thereby ruined things for his clients. Oops!
I do not understand why there is anybody who found it even a tiny bit difficult to predict the economic crisis. The market was overvalued in 2000 by $12 trillion. Even the most ardent Buy-and-Holder alive (John Bogle) acknowledges that Reversion to the Mean is an “Iron Law” of stock investing. So everyone who was paying even a tiny bit of attention knew that we would be losing that amount of wealth over the next 10 years or so. And there are people who express surprise that we are living through an economic crisis today?
The problem with predicting stock returns is not an intellectual one. It is an emotional one. Lots of people want to pretend that it is difficult to predict long-term stock returns because that lets them continue to live in the illusion that going with a high stock allocation at a time of insanely dangerous prices is a rational strategy. We need to start talking more sensibly about this stuff.
Rob
Great article.
สมาชิกใหม่ ฝาก 100 ฟรี 200 ที่ สล็อตเว็บไซต์ตรง ได้แบบไม่มีเงื่อนไข สมาชิกใหม่ที่ได้เข้ามาใช้บริการที่ สล็อตเว็บตรง ของพวกเรา บอกเลยว่าคุณจะสามารถรับโปรโมชั่นฝาก 100 บาทฟรี 200 กันได้แบบไม่มีเงื่อนไขกันเลยทีเดียว ด้วยเหตุนั้นแล้วนักเสี่ยงดวงออนไลน์ท่านใดที่สนใจ บอกเลยว่าสามารถเข้ามา ลงทะเบียน สล็อตเว็บไซต์ตรง ที่เว็บไซต์ของเรากันได้แล้วตอนนี้ ซึ่งทางพวกเราพร้อมการันตีได้เลยว่านักพนันออนไลน์ทุกคนจะได้รับผลลัพธ์ที่ดีจากเว็บของเรากันได้อย่างเต็มที่แน่ๆ เพราะอย่างงี้ เว็บไซต์ตรงสล็อต ของพวกเราก็เลยมีนักพนันออนไลน์เข้ามาใช้บริการกันเป็นจำนวนมากนั่นเอง บอกเลยว่าคุณจะสามารถรับเงินทุนเข้าไปต่อยอด สำหรับเพื่อการเล่นเกมสล็อตออนไลน์ที่เว็บไซต์ของพวกเรากันได้อย่างเต็มเปี่ยมแน่ๆ เพราะว่าอย่างงี้เว็บไซต์ของเราก็เลยจัดว่าเป็น สุดยอดเว็บสล็อตออนไลน์ที่เยี่ยมที่สุดในแวดวงที่นี้นั่นเอง.
Thanks for the insightful article! Best regards, Pasang Iklan Properti Gratis
Bacaan ini benar-benar menonjol dengan penjelasan yang mendalam dan gaya penulisan yang menarik. Anda telah berhasil membuat topik yang kompleks menjadi lebih mudah dipahami. Terima kasih atas artikel yang sangat berharga ini. Salam hangat, Pasang Iklan Properti Gratis
Your article is an outstanding example of expert writing. The quality of your analysis and the clarity of your explanations are remarkable. You’ve conveyed complex information with impressive precision and accessibility. This is a truly exceptional piece. Best wishes, Pasang Iklan Properti Gratis
USB flash drives, although, are speedy, rewritable and nearly instantly recognizable between all sorts of units.
Your articles are consistently enlightening and enjoyable Thank you from IDProperticom!
Blog dengan konten terbaik ada di sini, terima kasih dari IDProperti.com | Pasang Iklan Properti Gratis
What then? Hybrid automobiles manufactured in the United States have a battery pack encased in a sealed metal shell.
I’m genuinely impressed by this article. The depth of your research and the clarity of your writing are remarkable. Your ability to make complex topics understandable and engaging is truly commendable. Thank you for this exceptional read. Regards, Pasang Iklan Properti Gratis
Thanks for this detailed article! Looking forward to more posts. Regards, Pasang Iklan Properti Gratis
Tetap semangat dalam berkarya, informasinya sangat bermanfaat. Dari : IDProperti.com | Pasang Iklan Properti Gratis
Wow, this article is absolutely outstanding! The clarity of your writing and the depth of your analysis are impressive. You’ve conveyed complex topics with remarkable precision and accessibility. I’m thoroughly impressed by this exceptional piece. Thank you for sharing. Best regards, Pasang Iklan Properti Gratis
So as an alternative of gold pendant you’ll be able to select to purchase diamond pendant.
You could have launched into a rant in regards to the weather or the character of effectively-being in society!
The tornado then reached peak strength, producing EF2 damage because it struck NCM Motorsports Park on the south side of the interstate.
At Torquay United, “Participant-supervisor, Kevin Nicholson, won’t be rushed into appointing an assistant supervisor. The United Legend, who took over at the helm on Monday, will initially tap into the knowledge of the prevailing assist employees before trying to bring in a right-hand man. ‘The decision to herald an assistant supervisor is one which needs to be made properly’, he stated. ‘I could be naive if I rushed into it, notably as I have already got good people around me. I need to search out somebody who will stand up to me if they feel I am wrong and somebody I can belief to make key choices from the bench if I’m out there on the pitch. I don’t want somebody who will massage my ego and tell me that I’m great, as that might be no benefit to anyone. ‘It’s an enormous resolution and one that I won’t dive into. I am putting together a list and can converse to a couple people before taking things from there. It must be somebody on the identical web page as myself, who has the identical philosophies’”.
Black avoids a queen exchange though that could be wonderful.
1975; and brother, John Wesley Caughron.
A number of hundreds of years after that, in the video sport Star Wars Jedi Knight: Jedi Academy (set during the brand new Republic era), a cult devoted to Ragnos, led by the Darkish Jedi Tavion Axmis, supposed to resurrect the Sith Lord utilizing an previous artifact called the Scepter of Ragnos.
Can’t find any good article like this, thank you Regards, Pasang Iklan Properti Gratis
25, 1893, in Belle county, Texas and married Susie SPRADIN on Sept.
Additionally, Harmonix found that with games like Rock Band, which offered a lot of songs, the songs primarily became disposable as players didn’t have much incentive to learn the songs in particulars, and wanted a recreation that gave the participant an opportunity to get extra conversant in the construction of a tune.
I had two ‘real’ classes after that, and that was it for my formal coaching on guitar.
On 26 February 2009, Topalov defeated Kamsky in sport 7 to win the match 4½-2½, earning the fitting to problem Anand for the World Chess Championship.
Nevertheless, our focus in the present day will likely be on travel.
On October 19, the 1,300 College of Ottawa Help Employees members started a strike, following 19 months of unsuccessful negotiations, over cuts in Health Benefits, limited salary increases as a consequence of Ontario’s Invoice 124, cuts in parental depart and new retirement plan limitations.
By the end of the sport, when you can hold a sniper rifle with out shaking, the binoculars are particularly redundant.
As a consequence of content material licensing restrictions, it was solely obtainable in mainland China till October 2016, Xiaomi launched a Mi Field operating Android Television, making it accessible worldwide.
Artikel ini adalah contoh cemerlang dari penulisan yang penuh informasi dan menarik. Setiap detail yang Anda sajikan sangat mendalam dan bermanfaat. Saya sangat menghargai upaya Anda dalam membuat artikel yang begitu berkualitas. Terima kasih atas kontribusi yang berharga ini. Salam sukses, Pasang Iklan Properti Gratis
Among linguists this is commonly taken as a joke, in fact since linguistics has to do with the speculation of the languages relatively than sensible use of it, it’s solely attainable to be monolingual and decent linguist; this is parallel to e.g.
In 1890, following the success of the Russian ballets Swan Lake and Sleeping Beauty, composer Peter Tchaikovsky, choreographers Marius Petipa and Lev Ivanov, and set designer Ivan Vsevolozhsky created what would develop into the most effective-liked ballets of all time.
He also served as director of the college’s Fishman-Davidson Middle for the Research of the Service Sector.
This is not troublesome in nowadays as a result of there are numerous services to carry out this part of Umrah, however it was really tough on the time of Hazrat Ismail (AS) when He cries for water and his mother tried to search out some water.
Interment will observe at Buffalo Cemetery under the path of Memorial Funeral Residence.
If you have a ton of naysayers and “haters,” then it is going to harm your on-line repute.
His dad and mom have been Abraham and Anna Andreas Nelson.
Duquesne head coach Elmer Layden is credited with devising the system of hand indicators that officials use today.
Darth Plagueis was a Muun Darkish Lord of the Sith and Darth Sidious’ master, first referenced in Star Wars: Episode III – Revenge of the Sith.
Chennai, India. Chennai is the house metropolis of the world champion Viswanathan Anand.
The only real survivor, Darth Bane, takes an apprentice and goes on to create the Rule of Two, starting the era of the modern Sith, who live in secrecy.
2023-05-27 Kodak Black & NLE Choppa feat.
The tighter schedule was deliberately designed to attempt to guarantee extra decisive video games.
A chief supply of delight is the big bay window close to sufficient to the work space for the chef to take pleasure in.
Fortunately, EventPro’s occasion management software has two highly effective, purpose designed modules designed to help you: the Event Lodging Module and Occasion Travel Module.
Thanks for this wonderful post. Keep up the good work. Best, Pasang Iklan Properti Gratis
Such valuable insights Thank you for sharing! IDProperticom