The Black Swan


October is here and while kids are searching for the right costume to perform tricks that may surprise and be unexpected for the neighborhood, investors are getting prepared for similar unpredictability of their own.

According to Investopedia, September and October are historically months most feared in the financial calendar because of Black Swan Events. If you have never heard of a Black Swan event, here is a brief explanation. "Black Swan" a theory given to historical events. The phrase came from a Latin expression, by poet Juvenal, who claimed it is the characterization of something being "rara avis in terris nigroque simillima cygno" (a rare bird in the lands and very much like a black swan)", Originally, no one had ever heard of a black swan so it was presumed to not exist. Until 1697, when Dutch explorer Willem de Vlamingh discovered black swans in Western Australia. [1]. This turned the idea the positivity of thought on its ear. People had only seen white swans and presumed they were the only kind that existed. So seeing this rare, impossible and unbelievable black swan made everyone re-think his or her own ideas.

"Black Swan," took on a more mainstream approach when, according to Nassim Taleb," a 19th Century John Stuart Mill used the black swan logical fallacy as a new term to identify falsifications" [2]. Nassim Taleb in his 2001 book Fooled by Randomness; which is focused on financial events, extended the metaphor of the black swan to events outside of the financial markets. He explained three characteristics of a Black Swan Event:

1) The disproportionate role of high profile, hard to predict and rare events that are beyond the realm of normal expectations in history, science, finance, and technology.

2) The non-computability of the probability of the consequential rare events using scientific methods (owning the very nature of small probabilities).

3) The psychological biases that blind people, individually and collectively; share to uncertainty and to a rare events massive role in historical affairs.

Taleb regards almost "all major scientific discoveries, historical events and the artistic accomplishments as "black swans"- undirected and unpredicted. The examples he offers in the book are: the rise of the Internet, the personal computer, World War I, dissolution of the Soviet Union, and the September 11, 2001 attacks" all black swan events. You may notice that black swan events are both positive and negative.

Why is this important when looking at investments? Black Swan events are going to happen and they are situations within the markets outside of our and your control.

The team and advisors at CPF Texas are keenly aware of all of these hiccups, challenges, opportunities and events, which color the markets and are always watching, reading, discussing and evaluating the portfolios to manage through each situation. Enjoy September and October, find your costume and enjoy all the fall season has to offer, fear the trick or treators and we will continue to help you pursue your financial and retirement goals.

[1] Parliament, AU: Curriculum, archived from the original on 2011-03-01
[2] Hammond, Peter (October 2009), WERI Bulletin (1), UK: Warwick.