There’s nothing like a good image to drive home a message. The black swan has become practically a household phrase, and now Michele Wucker introduces us to a new animal. In The Gray Rhino: How to Recognize and Act on the Obvious Dangers We Ignore (St. Martin’s Press, 2016) she tackles the “unknown known,” “the information we may have available in our heads but that we’ve refused to give its due.” (p. 54)
Wucker suggests that behind every Black Swan is “a converging set of highly likely crises.” (p. 8) These likely crises can be a source of opportunity for the few who are ready to act, a danger for those who do nothing. As she writes, “When facing a rhinoceros that’s about to charge, doing nothing is seldom the best option.” And yet “the impulse to freeze is hard to overcome. Sometimes the grip of denial is so strong that we do nothing at all; or, even worse, as in many market booms leading to bust, we do more of what was dangerous in the first place.” (p. 22) In some cases, “these Gray Rhinos have the potential to become herds… In the zoological world, a rhinoceros herd is called a ‘crash’; I cannot think of a better choice of words.” (p. 25)
Dealing with Gray Rhinos is not a straightforward enterprise. First, they have to be identified, which involves an element of prediction, and most predictions are wrong. Then, if there are multiple potential dangers, they have to prioritized and responses timed. “There are costs to acting too soon.” (p. 108) The list goes on, the complexities multiply.
Baupost's investment process involves "never-ending" gleaning of facts to help support investment ideas Seth Klarman writes in his end-of-year letter to investors. In the letter, a copy of which ValueWalk has been able to review, the value investor describes the Baupost Group's process to identify ideas and answer the most critical questions about its potential Read More
But the upshot is that we should never simply stand still. “Muddle if you must, but, if you do, muddle strategically by preparing for the moment toward which procrastinating eventually leads. … If you can, make a plan ahead of time and use it. … Even better, create automatic triggers that will force you to act at times when panic might otherwise cloud your judgment.” (p. 228)
The Gray Rhinos Wucker writes about are for the most part big issues, such as water shortages, economic crises, and creative destruction. But all of us have Gray Rhinos in our lives. Some are crises waiting to happen that can be averted by the proverbial “stitch in time.” Others are crises that we may not be able to avoid but that we can nevertheless prepare for—for instance, by having an automatic trigger to sell a stock that is collapsing. Still others are potential opportunities, like shorting a company that seems fraudulent.
Gray Rhinos are out there. It is our job to think independently and critically to identify them, to devise a way of dealing with them, and to act either preemptively or in such a way as to mitigate their worst effects. It’s all about risk management.