This Day On The Street
Continue to site
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

Kass: A Contagion of Black Swans

But we must be mindful!

Throughout history, there have been times when it has even been more profitable for investors "to bind together in the wrong direction than to be alone in the right one." The long-term direction of equities will likely always be "higher," and the crowd of optimists will invariably outperform the remnants of pessimists.

Nevertheless, for years, investors seem to have been blinded to the uncertainty of the "rare" Black Swan event. We now know that these Black Swans are occurring with greater regularity and with greater overall impact -- and, as such, we must recognize that the occurrences may not only hold the potential for reducing aggregate growth but that the uncertainty of these outlier events could conceivably cast a pall over stock valuations.

After all, the inability to predict Black Swan events implies a greater inability to predict the course of economic and market history -- whether it is a natural disaster, a surprising geopolitical event or an unexpected economic or credit outcome.

It is only obvious after the fact, as investors, in particular, seem to harbor a crippling dislike for the abstract (like Black Swans). Perhaps the problem with experts is that they do not know what they do not know.

For some time, investors have been, as Taleb writes "picking up pennies in front of a steamroller," exposing themselves to the high impact, rare event yet sleeping like babies, unaware of it.

But recent events might bring on some nightmares.

Of a more immediate practical consequence to this writer is that our domestic economy faces numerous structural issues (the most important of which are the extreme fiscal imbalances at the federal, state and local levels), with governments (here and abroad) not necessarily up to the task of dealing with the complexities.

Given the "newness" of these and other nontraditional and secular challenges as well as the greater frequency of Black Swan events, P/E multiples might be pressured and could even contract as a comparison between today's valuations to those of history can be expected to lose some of its significance and relevance.

"If you hear a 'prominent' economist using the word 'equilibrium' or 'normal distribution,' do not argue with him; just ignore him, or try to put a rat down his shirt."

-- Nassim Taleb

In summary, I marvel at the confidence of strategists in a smooth and self-sustaining economic recovery in such an uncertain world.

2 of 3

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
SYM TRADE IT LAST %CHG
BP $43.46 0.00%
AAPL $130.28 0.00%
FB $81.53 0.00%
GOOG $565.06 0.00%
TSLA $218.42 0.00%

Markets

DOW 18,080.14 +21.45 0.12%
S&P 500 2,117.69 +4.76 0.23%
NASDAQ 5,092.0850 +36.0220 0.71%

Partners Compare Online Brokers

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs