Black Swan this, Black Swan that. It seems like the term "Black Swan" is on everyone's lips these days and is even in the title of a John Bogle speech.
So, where have you been?
Actually, I'm referring to the No. 1 best-selling business book of that title by former bond trader Nassim Nicholas Taleb. The reason for the book's popularity is that it helps explain the unpredictable. It helps prepare us for events that are "off the charts" -- such as the 25 percent, one-day drop in stock market values back in 1987, or the terrorist attacks of Sept. 11, 2001.
The swan metaphor comes from the understanding that there was no such thing as a black swan. Nobody for centuries had seen anything other than white ones until a black swan was discovered in Australia one day, proving the improbable can become a possibility.
Our attempts to create order in the universe are monumental. Taleb would describe them as being laughable. We also pay (he would say "waste") a lot of money turning to "experts" who claim to have the future all figured out -- at least within certain parameters having varying degrees of risk.
We seize on any narrative that helps explain the future -- even when an existing set of facts can generate two entirely different narratives. It's the old Harry Truman complaint of wishing he knew a one-armed economist so he wouldn't have to endure the time-worn saying, "on the one hand, this will happen; on the other hand it might be that."
There are some fields in which people are actually experts -- such as test pilots, chess masters, accountants and physicists. Then, there are disciplines where people tend to not be experts, as much as we would like to think they are.
Here we're talking about stock brokers, psychologists, judges, economists, "risk experts," financial advisers, intelligence analysts such as the CIA and, I would add, financial columnists.
Taleb says that professions dealing with the future and basing their studies on the nonrepeatable past tend to have an expert problem. Those who provide no tangible added value are generally being paid to predict the future.
He outlines the extent to which economics and finance have gone to elaborate lengths to create an "exact science" out of predicting economic events and, by extension, managing money.
"By 'exact science,'" Taleb said, "I mean a second-rate engineering problem for those who want to pretend they are in the physics department -- so-called physics envy. It kept economists out of bars, solving equations at night."
"Black Swan" paints a picture of a world of uncertainty. Totally unpredictable major events (both positive and negative) are the ones that affect us far more than those we typically recognize as the comfortable bell curve of probable outcomes.
The stock market, for example, has the highest probability of rising by about 10 percent per year. There is far less chance that it will earn 20 percent or lose 10 percent, and we can plot this out on a bell curve based on past history.
However, if you look at the stock market performance in the past 50 years and remove just the 10 single-best days of performance, your total amount of money today would be half what it would have been had you benefited from those 10 "Black Swan" days.
Likewise, the 1987 crash and the unlikely mayhem of Sept. 11 were what we might call the dark side of the Black Swan phenomenon.
How this should prompt us to act as investors is to reflect on our individual circumstances and set aside any preconceived notions of what we might expect based on past history. Are we accepting as gospel some formula for investment success based on history or someone's opinion?
Are investments positioned in a way that they can withstand a doomsday scenario while still having some skin in the game to capitalize on a major positive event?
It's the effect of the highly improbable that this book prompts us to contemplate. Beyond its readable entertainment value, it offers a wake-up call for those of us who might otherwise be whistling past the graveyard these days.