The Bull and the Swan

Preparing for the swan, it’s possible to miss out on the bull.  In my monthly commentary for Fairway, I asked “What does a 20% gain feel like?”  Spoiler alert: it feels like right now.  The S&P 500 is up about 20% since the bottom in February.  However, no sales people were calling my office 6 months ago to pitch me on how to make the most of the next 20%+ market move to the upside.  Pitches were framed entirely around disaster scenarios or worse… a sideways market (heaven forbid investing turn boring).  The financial product industry has spent the last 7 years pitching products to survive the next Black Swan event (or more accurately, to beat the previous Black Swan), but what happens when the next Black Swan turns out to be a Bull?

What is a Black Swan, anyway?  It’s an unexpected event as outlined in Nicholas Taleb’s book The Black Swan (a must-read).  The name Black Swan comes from when Europeans first set foot in Australia.  Finding black swans was not only a shock to them, but hadn’t even been on the list of possible outcomes for the explorers since they had only known white swans before.

An “unknown unknown” (as Donald Rumsfeld might put it), a Black Swan event has the potential to wreak havoc on an investor’s portfolio.  There were few safe havens during the last Black Swan (the Financial Crisis), but fund companies have been working overtime to pinpoint the next Swan-proof asset class.  This is a silly exercise to begin with: create a safe investment for a disaster that no one can predict.  That did not stop them from creating a slew of bond funds that would take advantage of the coming rising rate environment (still waiting for those rising rates, by the way).  While cooking up new products, fund companies also re-branded previous offerings that had a lackluster track record as ‘liquid alternatives’.  Doomsday product sales did brisk business during the bull run.  The news coverage of the downturn at the beginning of the year and of the Brexit vote was relentless, but now that we’re up significantly, it’s crickets.  Can you imagine what CNBC would be like if the markets dropped 20% over the last 6 months instead of gained?

It’s important not to get distracted by financial pulp fiction.  In over-preparing for the worst, we can miss out on the best.   If we can’t recognize the times when the market is good, how will we know when the market is truly difficult?  Investing is an inherently optimistic activity.  No one invests with the expectation of losing money.  If we react to positive market action with a shrug of the shoulders, we will lose perspective quickly, jeopardizing the entire endeavor.

Photo by karanj