Crashes and swans

November 01, 2019

"No one can tell you when [crashes] will happen," Warren Buffett said last December. "The light can at any time go from green to red without pausing at yellow."

Most drivers slow down when a light flips yellow. A few, and I'm not naming names here, view yellow as an acceleration signal, a green race flag if you will. Neither is correct in investing, though most people, if they do see a yellow light in investing, pause.

Unfortunately for the Wall Streets bankers partying in the Hamptons on Saturday, October 19, 1929, Buffett wouldn't be born for another eight months, and even then most people don't take investment advice from babies.¹ As that fateful weekend 90 years ago rolled into what appeared to be an average work week, Thursday October 24th proved to be anything but, and the largest stock market crash in U.S. commenced. Bottles of champagne morphed into bread lines.

For some strange psychological reason, prognosticators sound smart when they predict crashes and happy-but-maybe-oblivious when they predict gains, especially when worry prevails. Historically this is silly²: betting on stock market crashes is an excellent way to make yourself poor, or at least poor relative to where you should have been. The investor may have been right from time to time, but over a medium to long period that decision didn't work out well. A bet against markets is a bet against ingenuity, incentives, and a human desire to improve and change.

A few of you have mentioned Black Swans to me this week. First, actual black swans exist in nature, which I find cool. But the reference people are making is to Nassim Nicholas Taleb's 2007 book The Black Swan, which discusses the impact of highly improbable events. Culturally a Black Swan event is accepted now as a downside event, or something bad. But keep in mind the book defines them as "improbable," not "negative."

This is interesting to consider with recession talk swirling. Perhaps it is improbable, but a Black Swan event today may be that we sit only midway through an economic boom.

Dan Cunningham

(1) Though they probably should. Fidelity showed from 2003 - 2013 that investors who had died or forgot they had an account outperformed the average professional and retail investor. Based on this, random stock picks from a baby, as long as they were low in fees, plentiful, and not traded, have a decent chance of outperforming. Effectively the baby would be creating a pseudo-index. Source.

(2) But they build their media presence by doing so. Read this.