Kass: Grading and Updating My Surprises

This blog post originally appeared on RealMoney Silver on July 21 at 8:21 a.m. EDT.

"To predict the behavior of ordinary people in advance, you only have to assume that they will always try to escape a disagreeable situation with the smallest possible expenditure of intelligence."

-- Friedrich Nietzsche

We are now more than halfway through one of the most tumultuous and painful investing years in history, so it's time to grade and update our annual surprise list.

For a little background, in late December/early January in each of the past five years, I have taken a page from my friend and former Morgan Stanley strategist Byron Wien (now the chief investment strategist at Pequot Capital Management) and prepared a list of possible surprises for the coming year.

"I'm astounded by people who want to 'know' the universe when it's hard enough to find your way around Chinatown."

-- Woody Allen

The real purpose of this endeavor is to consider positioning a portion of my portfolio in accordance with outlier events, with the potential for large payoffs, and to disprove Nietzsche, who said that we live the same life over and over again. After all, Wall Street research is still very much conventional, almost universally bullish and consisting of nonvariant "groupthink" despite the attempts of reform over the past several years.

Mainstream and consensus expectations are just that, and, in most cases, they are deeply imbedded into today's stock prices. If I succeed in at least making you think about outlier events, then the exercise has been worthwhile.

Last year's (2007) surprise list was our most accurate ever. It wasn't the quantity of the correctly predicted surprises that made 2007's list a remarkable success; it was the quality, as I hit on nearly every major variant theme -- the severity of the housing depression, the turmoil and writedowns in the credit markets, the curtailing of private equity deals and the reawakening of equity market volatility.