My friend knows many of the top value investors. He also is very close with Alice Schroeder, who became “contraversial” after her exclusive, best-seller The Snowball, on Warren Buffett was published. My friend told me that “I have met some of the smartest money managers in the business, but Alice Schroeder is one of the smartest people I have ever met.” I am reading Christine Richard’s book about Bill Ackman, Confidence Game: How Hedge Fund Manager Bill Ackman Called Wall Street’s Bluff (Bloomberg) (great book, review to follow shortly), and the author notes how Bill Ackman also holds Alice Schroeder in high regards, and that she was the only analyst that Warren Buffett followed on Wall Street.
Alice Schroeder wrote a great piece on Bloomberg lately commenting how meaningless the term “black swan” has become. One characteristic about black swans is that everyone says after the event occurs how it was obvious in hindsight. I ask in return, if I told you on March 10th, 2011 that a massive earthquake with hit Japan, kill tens of thousands of people, cripple the economy etc. you would tell me I belong in an an insane asylumn or on the streets of mid-town. Lo and behold the tragedy happened the next day. EVERYone I meet says the hindsight that the housing bubble was obvious, I have met FAR fewer who shorted it or even minimally prepared their portfolios for a downturn.
Black Swans are also events that no one can predict. While “black swan” strategies are now very “in style”, no one really can hedge against black swan events, since they are basically unpredictable. While everyone was protecting themselves for a possible Greek default, how many people protected themselves against revolutions in Egypt and Yemen, which could have/can potentially cut off oil supplies? The countries are not major oil producers but are geographically located to cut off major shipping lanes. There is also risk of contagion to other countries like Saudi Arabia, which has the largest (or second largest if you believe Hugo Chavez) reserves of oil in the world? I rest my case.
Without further to do, some insightful (and differing) thoughts from Alice Schroeder on black swans:
Nassim Taleb believes in probabilities, not predictions, but at times it can be hard to tell the difference. “The real Black Swan event,” he said in June, “is that people are not rioting against the banks in London andNew York.”
Taleb saw it coming, and his well-publicized remark may be the only reason Occupy Wall Street hasn’t been labeled a black swan. This once-rare bird, made ubiquitous by Taleb’s best- selling 2007 book of the same title, now appears so often after dramatic events, such as Occupy Wall Street, that sightings of it have become meaningless.
The black swan was meant to be a rallying cry for preparedness. Instead it has become the opposite: a loathsome excuse for lack of planning by those who should know better. We need to send the swan to a rear shelf in the closet of ideas to gather dust until an actual black swan appears.
In the past two years, the term “black swan” has been applied to the earthquake in Haiti, the deadly Russian heat wave, the Gulf of Mexico oil spill, the stock market’s “flash crash” of 2010, the volcanic eruption in Iceland that spread an ash cloud over Europe, the Standard & Poor’s downgrade of the U.S.’s AAA credit rating, the populist uprising inEgypt, and lawlessness in Mexico.
The black swan has been so trivialized that it was even used to describe the 2010 “snowmaggedon” winter storms in Washington. And, of course, the black swan has been blamed over and over for laying the egg known as the financial crisis. Some observers are convinced that when they look at the sovereign debt crisis unfolding in Europe, they see ebony wings.
Taleb’s book regaled readers with stories of a space- shuttle explosion, the rise of Adolf Hitler, World War II, the emergence of Islamic fundamentalism, and the stock-market crash of 1987. Yet none of these events, nor recent crises, fits his definition of a black swan: the “unknown unknown,” an outlier with extreme impact for which nothing in the past “can convincingly point to its possibility.” In fact, if you waited long enough, the odds of such things happening approach 100 percent.
Taleb knows there are fewer black swans than people think. But he disdains experts, predictions and theories of causality. This makes his concept slippery: If nothing can legitimately be forecast, then anything is a black swan.
To his credit, in a revised edition of the book, Taleb freely admits he took the black-swan metaphor too far. A philosopher challenged his definition, to which he responded, “Indeed, she caught me red-handed. There is a contradiction: This book is a story.” He added, “Ideas come and go, stories stay.”