Kass: Updating My 2010 Surprises

This blog post originally appeared on RealMoney Silver on May 24 at 8:43 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 almost five months through 2010, and those past five months, similar to the 12 months prior that preceded them, have been one of the most tumultuous periods in financial history. Recently, the pleasure in place for the first four months of the year has been supplanted by pain and uncertainty.

What does the balance of 2010 hold? How do we profit? For some possible answers, it's time to grade and update my 2010 surprise list.

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

-- Woody Allen

For those new to TheStreet, a little background.

In late December over the past seven years, I have taken a page from former Morgan Stanley strategist Byron Wien, who is now Vice Chairman of Blackstone Advisory Services, and prepared a list of possible surprises for the coming year. (Byron had a very successful 2009 surprise list. Here is his 2010 surprise list.)

My surprise list is not intended to consist of predictions but rather events that have a reasonable chance of occurring despite the general perception that the odds are very long. I call these "possible improbable" events.

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. 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 embedded into today's stock prices. If I succeed in at least making you think about outlier events, then the exercise has been worthwhile.

Too often we are played as suckers as we just accept the trend, momentum and/or the superficial as certain truth without a shred of criticism. As a society (and as investors), we are consistently bamboozled by appearance and consensus. Just look at those who bought into the success of Enron, the financial supermarket concept at Citigroup (C), the uninterrupted profit growth at Fannie Mae (FNM) and Freddie Mac (FRE), housing's new paradigm of noncyclical growth and ever-rising home prices in the early to mid 2000s, Saddam Hussein's weapons of mass destruction, the heroic home-run production of steroid-laced Major League Baseball players Barry Bonds and Mark McGwire, the uncompromising principles of New York Governor Elliott Spitzer, the morality of our politicians (e.g., John Edwards, John Ensign and Larry Craig), the consistency of Bernie Madoff's investment returns (and those of other hucksters) and the clean-cut image of Tiger Woods.