Good Day All, In this weeks musing we are going to talk about the dreaded black swan! If you have been around trading for any length of time then you have probably heard of the black swan or more appropriately a black swan event, but do you know what it means or is it just another silly wall street saying that nobody really understands? Let’s explore and see what we can find out?
First, the history or better yet the story of the black swan. The term black swan is loosely translated to “a rare bird in the lands.” This rarity comes from the thought that there were only white swans in the world because in the recorded history of man before the late 1600s no one had ever seen one and therefore it was presumed there wasn’t any such thing as a black swan. This was proved inaccurate by an explorer named Vlamingh who discovered black swans in Western Australia. The significance of the black swan is that due to limited experience and knowledge man, made the assumption that the black swan didn’t exist and could not exist. As we now know this assumption is wrong and this is where the black swan saying percolates into wall street consciousness.
The black swan moniker was popularized by a fellow named Taleb who was trying to explain events that affect the markets are not as impossible as some think they may be such as several standard deviation type events or any event that is rare and unexpected. These events are thought to be hard to predict as well giving them the appearance that they are random and unusual. Taleb believed to a degree that these events were not so random and reaching these very unprobable events was not as crazy as some would believe. Many believe that certain events cannot happen just like many believed black swans did not exist but yet they do. One particular black swan event was the great recession of 2008. Many believed the housing market could never crash and that statistical probabilities would prevent that from happening but as we know that assumption was wrong and history is there to prove it.
So, do you believe there are no more black swan events to come? Are these future events actually random and unpredictable or are there causes that we just don’t see coming like the melting down of the housing market? Well, there were some that profitted greatly from seeing that event coming, if you need a deeper understanding of this then I would suggest a viewing of the movie “The Big Short.” This movie goes a long way into describing how some knew of this event to come and how many others thought it impossible.
Now, the topic of this weeks blog is the “New Black Swans” and it may be a bit tongue in cheek but you may find it has some truths behind it. So, what do Carl Icahn, Ray Dalio and Donald Trump all have in common? If you said they are all billionaires you would be correct but that is not the answer I am looking for. The answer, and yes there are many is that all three of these gentlemen are billionaires with twitter accounts. These billionaires and their twitter accounts seem to have enormus power. Mr. Trump is the noted exception to this trio as he is currently president of the United States and that does wield a certain amount of power in and of itself but even without that position it seems like these guys can move mountains with only 280 characters or less.
You may be asking yourself how these fit into the black swan discussion and I would say that if you were watching the markets yesterday at approximately 2:40pm you can see the power of certain individuals tweeting. Yesterday it was Trump’s tweet that caused the market movement or at least blamed for the market movement but I also know that in the recent past Mr Icahn and Mr. Dalio have tweeted things that have caused quite a reaction.
So it may be a stretch to call these tweets a black swan event but they seem to be rare and unexpected and they do have the power to move the markets in a significant manner and thus they are receiving the moniker “The New Black Swans.” I am not sure that this name will stick but I find it very interesting that we now operate in a world where one platform and a few individuals can cause so much activity with the power of their words and because we now live in a world like this I believe this is a very important time to review your trading and ensure that you are never overleveraged and that position sizing is your number one job when it comes to trading because at the end of the day whether it is a real black swan event or one of the new black swan events you don’t want to get caught going all-in when something like this happens as it can spell disaster for your portfolio.
Trade well and Stay safe from the Swans!
Coach “Old Money” Holmes