Gentlemen's Stock Picking Club

[Brat]

Twaddle, if you goal is an average of 10% return then put your money in Oakmark Balanced and sleep while they work hard.

OK, I admit that this is not exactly what those of us who frequently the stock picking club want to do. However, I have been taking a look at recent market performance and am not unhappy with OAKBX fund managers during the recent instability. I have a high % of our investments in balanced funds and managed global funds, 5 years in cash/I-bonds, the rest in equities where I would like +20% return... fun money so to speak.

High return = high risk. IMHO it is better to lower your cash position and find equities that are solid investments than go swan hunting.

 

[twaddle]

High return = high risk. IMHO it is better to lower your cash position and find equities that are solid investments than go swan hunting.

Well, that's sort of the question I'm trying to answer: which is better, the conventional wisdom or some of these less conventional approaches.

OAKBX is a pretty pedestrian 60/40 fund. Nothing wrong with that, but Swedroe and Taleb both have proposed significantly different approaches that in theory could have higher return with lower downside risk.

Consider Swedroe's approach for example. He's 70% in bonds, and 30% in a mix of ScV, Intl ScV, EM, and commodities. Expected return is > 10%, which is about the same as the expected return of 100% stocks. But expected volatility is about 1/2 that of 100% stocks. I find that an interesting approach.

Taleb takes this one step further with 90-95% in bonds, and 5-10% in highly speculative investments like far OTM options. I have no idea if his approach actually works, and I haven't seen any sort of backtesting for it, so it would be interesting to construct a portfolio using that style and compare it to the more conventional approaches going forward.

BTW, I'm out of town now and haven't had a chance to acutally watch the market in the last couple days. I'll try to get back on this experiment next week.

 

[roadtoharvard]

I'll be the babe that ventures out from the woods for a bit.

Here's my picks

$70,000 split 7 ways

398 AHL @ 25.09
665 HW @ 16.52
443 KEP @ 22.53
1851 DFC @ 5.40
462 INDM @ 21.64
393 IPCR @ 25.42
324 YRCW @ 30.81

$30,000 split 2 ways

241 VUG @ 62.19
217 VPL @ 69.00

I hope the monkey is off his game this year.

 

[Brat]

Twaddle, I agree that OAKBX is 'pedestrian' so to speak. I wouldn't choose it if I had more than 15 years to go to retirement. But I was there, had 40% of our retirement assets in Exxon, probably should have stayed put.. BUT, we are retired and for many reasons need to limit my swan hunting to tags with short hunting seasons.

What makes me wonder is your huge % in cash = and relatively small % for hot equities. Too much like playing poker with a weak draw.

 

[twaddle]

What makes me wonder is your huge % in cash = and relatively small % for hot equities. Too much like playing poker with a weak draw.

Well, to clarify, I'm not talking about my actual portfolio (although I do hold FXI and DRYS -- woohoo!).

Everybody knows that the long-term return of the S&P 500 is around 10% nominal, right? Most people also know that the std dev is about 15%, and every once in a while you'll experience a drawdown of around 30% with a 100% S&P 500 portfolio. Obviously, that downside volatility matters to a lot of people, especially retirees who are living off their portfolio.

So, let's play a game. How many ways can we find that will return that same 10% on average but with less downside risk? The conventional wisdom is that if you reduce your downside exposure, you also reduce expected returns.

Swedroe found a way to reduce the std dev to about 7%, with a maximum drawdown (in theory) of about 14% and the same 10% average return. Pretty neat, eh?

So, the idea behind 90% bonds and 10% highly-speculative investments is that you can minimize your downside risk to 10% (or whatever you allocate to speculative investments) with the idea that the speculative portion of your portfolio can provide high enough returns on average to bring you up to the level of S&P 500 returns (with much less risk).

I'm not sure it actually works, and I'm not even sure how to test the idea. How do you cast your net wide enough to capture those high risk returns without diluting the returns you'd need? How often does a black swan come along to provide the needed returns?

Taleb's position is that very high-impact low-probability risks are significantly mispriced by the market. The idea of a "black swan" is that we all have confirmation biases that cause us to systematically underestimate unforseen risks. The name comes from the idea that most people only saw white swans. Every time they saw a swan, their assumption that swans only came in white was confirmed. Then, one day, somebody went to Australia and saw a black swan and all those confirming observations were rendered meaningless.

His premise is that you want to minimize your exposure to negative black swans (like Great Depression magnitude events) and expose yourself to positive black swans (like the dot-com bubble). I just find it an interesting idea that also applies to life beyond investing....

 

[greg]

How this fellow does it--as an individual investor--seems simple, practical, and straightforward:

Stay Away From Stocks

One problem I see with this system is that one MAY start to obsess in a distorted manner. My guess is that he could spend a bit too much time worrying about his 5%-10% Black Swan money and what may or may not happen to it; it may very well include a constant fretting about the direction of the macro economy. It's sort of the anti-thesis of indexing. Indexing: own a little bit of everything, let it ride without thinking about it too much, and then automatically rebalance according to some pre-established formula. Anyway this guy's approach seems to eliminate a lot of system/market risk and worry.

.............................................................................................................................

I'm having a very tough time thinking of ways to reduce risk without it (the risk) squirting out somewhere else--unexpectedly. Just look at the Japanese carry trade that may now be unwinding. It seemed perfect at the beginning: borrow low interest money and buy high interest bonds elsewhere. Pretty soon folks (hedge funds?) are leveraging the whole process up and then suddenly incremental interest rate fluctuations may lead to enormous negative consequences (a serious black swan event?). LTCM (Long Term Capital Management) was filled with rocket scientists with little black boxes. It appears on the surface--to me--that the actual hunt for 'risk free' may contribute to system risk over time? Any I don't even want to talk about mortgages and lending and AAA ratings in this country and what developed there.

 

[twaddle]

One problem I see with this system is that one MAY start to obsess in a distorted manner. My guess is that he could spend a bit too much time worrying about his 5%-10% Black Swan money and what may or may not happen to it; it may very well include a constant fretting about the direction of the macro economy.

Thanks for that link. I didn't realize Zvi Bodie had joined the Taleb camp.

My problem with the Black Swan bet is that you don't know when or if it'll pay off. So, that means you must be willing to lose your speculative bet. A 5% downside doesn't look too bad until you realize that you might be losing 5% per year for several years in a row. You need some pretty strong faith to believe that you'll actually witness the Black Swan and that the bet on it has a payoff asymmetric to the cost of the bet.

I think Swedroe's approach is more palatible to most investors since it follows pretty simply from Fama and French data. You're simply concentrating risk in a chunk of your portfolio (say, 30%) and reducing the dispersion of annual returns.

In theory, Taleb's and Bodie's approach do the same thing as Swedroe's, but the difference is that you can't calculate an expected return or the dispersion of returns with their approach. And that can be somewhat unsettling.

 

[greg]

twaddle:

When reading me, please remember I always sort of jump the gun a bit. By that I mean I start looking for some sort of rational (not empirical-based) organizing principle. The one I just used in the above post was placing all known methods of making money from financial instruments between two ends of a continuum: on one end, an individual who strikes out to make a big pile of money based on a single idea (e.g. Ray Kroc); on the other, to my mind, is indexing, taking as little risk as possible by buying a tiny bit of everything. This use of this idea comes from your cues on how you made money in a previous life (and you are very important to the process). Most everyone, including you, me, and Swedroe and Taleb can all be placed somewhere on that line between the two end points of this continuum. (And I can make lots and lots of mistakes at this preliminary level. Lots. Be forwarned)

So, to my mind, if you can bear with me and wait me out on this goofy methodology I'll promise some sort of insight into risk and BS (Black Swans).


First, on this continuum and [-]at[/-] near the extremes, risk is different at each chosen point. If one holds short term Treasuries for instance, bills, there is only macro risk and very little--if any--economic market risk: the risk is primarily the trust in gov't, the risk of inflation, and loss of principle if interest rates go crazy. No? The addition of TIPs and or I bonds to this mix modifies/reduces that risk even more but may very well reduce gains too.

On the other end, indexing, we have no worry of any individual stock going belly up. But we do have a large risk of macro recession, e.g. the S&P tanking or falling below bond rates for many years.

It's in the middle of this continuum where all the interesting [-]crap[/-] stuff happens, all the mixing and matching or risk components occurs and the various elements of risk, types of risk and what they are attached to and where and how--all the permutations and combinations. And it can get muddled very quickly.

Enough for today. Thank you.

PS

As I see it, Taleb tries to deal with all this stuff by reducing everything to numbers, factoring out all the human emotions of events. This may work for a while but, ultimately, will always fail. See LTCM. Black boxes don't work, at least for very long/

Warren Buffett, as I see things, is almost the complete opposite. He uses emotions, understands them , creates his advantages (and humanity's) thru a well developed understanding of them. A start up business, more than anything, needs owners that understand and use emotions wisely and prudently. It is this ability to use emotions and also think outside the box flexibly that sees possibilities and takes advantage. By example, Ray Kroc began McDonalds, I'm almost sure, by understanding that folks wanted a clean, reliable, consistent fast food experience--everywhere. He 'scaled up' the building and expansion process from understanding the emotions of his individual customers and creating a product.

As I see things.

 

[haha]

Greg, it is awfully early in the day to be drinking.

Ha

 

[twaddle]

Greg, remember the poet Donald Rumsfeld? He said:

As we know,
There are known knowns.
There are things we know we know.
We also know
There are known unknowns.
That is to say
We know there are some things
We do not know.
But there are also unknown unknowns,
The ones we don't know
We don't know.

​

Taleb is simply telling us that unknown unknowns -- the real surprises -- are always present and always mispriced. It's not a traditional risk that is included in some risk premium.

In fact, the traditional risk premia associated with beta, size, and value may be going away. What happens to a market in which the mindset du jour is "I can ride out short-term volatility, so I'm going with 100% stocks?" The risk premium decreases as more and more believe that. But there will always be a Real Surprise(TM) that knocks those people on their butts. Such as Japan 1990 or USA 1929. Those weren't just speculative busts. Those were mindset-changing busts that had unpredictable repercusions throughout the economy. A risk that everybody underestimated.

 

[Dawg52]

Twaddle, if you goal is an average of 10% return then put your money in Oakmark Balanced and sleep while they work hard.

OK, I admit that this is not exactly what those of us who frequently the stock picking club want to do. However, I have been taking a look at recent market performance and am not unhappy with OAKBX fund managers during the recent instability. I have a high % of our investments in balanced funds and managed global funds, 5 years in cash/I-bonds, the rest in equities where I would like +20% return... fun money so to speak.

I have a similar approach only I use Trowe Price Cap Appr fund as my anchor. Also own a good chunk of DVY. Probably 7-8 years worth of cd's. Over all, 48% Stocks/52% Fixed income. Follow the 100 rule.

 

[greg]

Greg, it is awfully early in the day to be drinking.

Ha

You're right! I'll switch back to beer.

 

[greg]

As we know,
There are known knowns.
There are things we know we know.
We also know
There are known unknowns.
That is to say
We know there are some things
We do not know.
But there are also unknown unknowns,
The ones we don't know
We don't know.
Taleb is simply telling us that unknown unknowns -- the real surprises -- are always present and always mispriced. It's not a traditional risk that is included in some risk premium.

OK, ha has told me that I'm casting my net too far (among other things). That's good.

I don't disagree with anything said above, but I still need to interpret it into usable information for me.

Unknown unknowns: Yup, they exist. And there really is no way we can use them or do anything about them, and we especially cannot make money off them. In order to make money, you need to place your bet; if you don't know where to place the bet, how can you bet? If you know where, you automatically know something, so it isn't unknown any longer. There are no odds that can be found about something that is unknown,and this is especially true if you don't know it is unknown. To me, at least at this point, Taleb doesn't make sense to me. Unless you can point me toward better explanation of what he means?

Known unknowns: This to me is the juicy area, the real place where Black Swans, both positive and negative, exist. To me this says, for example, we can't know what specifically those dang pesky terrorists are thinking (the unknown) but we certainly know they are thinking nasty things (the known). This sort of stuff has an infinite number and variety of possibilities.

1) We can know something bad is going to happen and just not know where or when or how.
2) We can know something good is going to happen on our birthdays, but not know what or where or who.
3) We can be day traders and know that a stock is acting peculiar that day, but not know why. And further, we may know that it is acting peculiar and in a way that historically has indicated a large movement up in price or a large movement down. (More of these later.)

As I see things we really do have a large number of unknowns out there in the financial world. But they all exist somewhere in time and space, these unknowns. So we can point them out as "in a place" (where?: the financial markets or the options market or . . . ) and "in a specific time" (when?: the future, within the next few days, before my calls expire . . . ).

I really have to have a better definition of unknown unknowns to do a better job of criticism. Can you help? Otherwise I'm stuck thinking Taleb didn't think things thru.


The Great Depression happened unexpectedly (an unknown) to many folks. And many of these same folks that didn't know it was coming also didn't know what the consequences would be after the first day of the DOW crash. Obviously an unknown unknown to some. Others saw it coming (known--at least partially) and got the heck out of the way because they knew what the consequences were (known--at least partially).

My conclusion so far: The human mind plays an enormous role in knowing and not knowing and, consequently, acting. Ask Rumsfeld [-]what he knew about Iraq before he went in[/-]? Ask Osama, who knew ahead of time, well before Rumseld figured it out, that Iraq would be at minimum a mess? Who of these two appears to have better judgment about Iraq today, at this point in time? Did someone partial know what was unknown to Rumsfeld?

 

[unclemick]

Depending on your body weight - six quick Budweiser's and then you'll be ready to buy a few hundred shares. The balance sheet/key stats begin to look better also.

heh heh heh - forget Rumsfeld and not to worry about the mailbox, I think you can autodeposit dividends to your bank account. Drink the Buds and all unknowns become known - until the next day when hangover hits. Plus you still have the dividends. Now back out to the BBQ(pork today).

 

[HFWR]

So to keep it simple: ten large cap stocks at 10K hypothetical dollars each=$100k total...

I'm rescinding my HFWR value portfolio in order to participate here.

http://www.early-retirement.org/forums/f44/hfwr-value-portfolio-29836.html

I'm still using the mechanical [-]bull[/-] [-]monkey[/-] stock screener method. Stock screen: mkt cap => $50B, P/E <= 10, P/B <= 2, for the new, improved HFWR value portfolio...

As noted in the preceding thread, I've created a userid, pw, and portfolios on bloomberg.com.

http://www.bloomberg.com/apps/subscriber/webport

Anyone wanting to enter their "magic portfolio" can use id "erorg_portfolio" and pw "portfolio".

 

[haha]

My conclusion so far: The human mind plays an enormous role in knowing and not knowing and, consequently, acting. Ask Rumsfeld [-]what he knew about Iraq before he went in[/-]? Ask Osama, who knew ahead of time, well before Rumseld figured it out, that Iraq would be at minimum a mess? Who of these two appears to have better judgment about Iraq today, at this point in time? Did someone partial know what was unknown to Rumsfeld?

I am not sure anymore what we are talking about, but if we are still discussing Black Swans, no way would Iraq meet Taleb's definition of a Black Swan, or for that matter a gray swan. A Black Swan is not unknown only because someone is too ignorant or too pig-headed to understand it. It has to be unforeseeable even to a person in possession of all facts and insights that it would be possible to have- including possession of a degree of humility and prudence. Unforeseeable at least in the sense that of all the many uncertainties that accompany a course of action, this one would not stand out as something to even consider.

A war going badly is a commonplace event that is almost always underestimated by governments and armies. The sub-prime meltdown is also not a Black Swan- any experienced and prudent person could have known that big instabilities and vulnerabilities were being built into that structure. No one could know when or if it would come apart, but only an idiot or someone with an agenda could deny that a considerable amount of risk existed. An over-stretched financial structure that caves in of its own weight and cumulative bad decisions is not a Black Swan.

A Black Swan comes out of left field; even prudent people do not seriously include it in their scenario planning.

Ha

 

[greg]

ha:

Has there ever been a Black Swan event, ever? Could you give me an example so that I can apply it to your definition? Thanks. 9/11, as a non-financial Black Swan?

 

[haha]

ha:

Has there ever been a Black Swan event, ever? Could you give me an example so that I can apply it to your definition? Thanks. 9/11, as a non-financial Black Swan?

I have returned the book to the library Greg, so I am not sure I remember correctly exactly how he classifies these things. I didn't try to get it down, because I think he is only useful to my thinking in a general way. I already tended to think this way, just from observing how many large events in my life were due to random occurrences.

As I remember, he calls the crash of 1987 a Black Swan- this was so off the bell curve that vague feelings that the market was somewhat overvalued did not constitute reason to suspect anything like this.

I think that the most useful application of these ideas is to question one's scenario building and not put too much faith in engineering type constructs like confidence intervals, sensitivities, etc. It will not be a comfortable idea to Excel Jockeys!

Ha

 

[greg]

Ha:

Thanks for your comment. I really don't think our separate thinking about this matter is that far apart. My problem is that I really don't think there are too many random events in the world, if any, and even then they just appear random. At times these things are indecipherable to me, but my poor miserable ego will not give up on the notion that if enough time, energy and intelligence is applied to [-]a seemingly random event[/-] problem, a cause will be found. That when push comes to shove and things are dissected after the event, legitimate causes can usually be found. But they may not be found before the event because no one bothers to look that hard. I suspect that the 1987 crash has enough written about it that we probably each could find some writing to back up our differing view points.

Of course, my bigger problem--to my mind--is that I took a course in business statistics 101 over thirty years ago and spent most of my time not thinking about math. My bad. I don't remember much. (And I know you see my bigger problem differently.) An idiot shouldn't play in the house of statistics.

So here's what I think we might agree on:

1) It's worthless energy spent trying to look for Black Swans, although one should always keep in mind that all swans so far may be white but a non-white one is possible somewhere, sometime.

2) Time is better spent looking for more obvious financial swans. This may mean looking for negative swans and buying puts or positive swans and then purchasing calls, both in smaller amounts to supplement our grander strategies of bearness or bullness.

Personally, I can't look for risk or measure it or explain it without believing it is possible to understand it also. Thanks.

 

[twaddle]

So here's what I think we might agree on:

1) It's worthless energy spent trying to look for Black Swans, although one should always keep in mind that all swans so far may be white but a non-white one is possible somewhere, sometime.

2) Time is better spent looking for more obvious financial swans. This may mean looking for negative swans and buying puts or positive swans and then purchasing calls, both in smaller amounts to supplement our grander strategies of bearness or bullness.

Personally, I can't look for risk or measure it or explain it without believing it is possible to understand it also. Thanks.

I won't disagree, but I'll try one more example. Imagine this headline tomorrow: "China Attacks US!" Everybody understands that the risk is there, but nobody expects it to happen tomorrow, and in no way is this risk reflected in any risk premium.

Who knows what this would do to the markets, but it probably would be ugly and prolonged. Anybody counting on historical returns or historical variance would be hurt badly. And, if you happened to have deep out-of-the-money puts on the S&P 500, you'd probably be a rich man tomorrow. Does that mean you anticipated the event or "looked" for that particular black swan?

Edit: BTW, I chose that particular example because China recently attacked the US:

China hacked into Pentagon computer network - Yahoo! News

 

[greg]

twaddle:

You said:

I won't disagree, but I'll try one more example. Imagine this headline tomorrow: "China Attacks US!" Everybody understands that the risk is there, but nobody expects it to happen tomorrow, and in no way is this risk reflected in any risk premium.



I have to disagree with your set up above, the use of ‘everybody’ and ‘nobody.’ One can say “everybody” hypothetically but reality says that things are very different from that. Not ‘everybody’ understands that the risk is there; nor do they see it the same. Some folks who are part of everybody don’t even have a clue that China exists. Children don’t know for the most part. Some voters ignore most every thing related to politics and foreign affairs. There are gradations of understanding about that risk and when and where and if such an event might happen.

Here’s how I see some possible gradations, or concentric rings of knowledge, regarding your possible event and my attempt to expand and change your use of “everybody” into something different. There are varying degrees or amounts of knowledge that the parts of ‘everybody’ possess:

1)The CIA and military leaders and/or President would see things best, have the best knowledge. They direct the spies and spy satellites and gather the information first hand; they gather data from Ambassadors, etc, etc.
2)The next level consists of folks close to the top levels of the military or gov’t agencies or White House. (In other words, this whole thing is 'trickle down' in action.) These folks would, in general, have less knowledge ('need to know'?) or derivatives of that information that helps them get their job done.
3)Citizens may receive some sort of knowledge.
4)Parents may tell their children something.
5)A kid might tell his doll or GI Joe what to do about China based on what his parents say.

Of course, each set of folks in each of these five gradations carries within/among itself the seeds of how risk is seen and then applied. Ordinary citizens, with their probably partial set of knowledge may be soothed or panicked about info/war with China. Ditto with each other group; they each will react mildly differently and think differently. Collectively, and within the financial markets, some sort of economic risk is derived and allocated to various parts of the economic pie related to risk of war with China. The military deals with its own set of related risks, mostly non-economic, to this potential event. Lots of stuff going on, with lots of different chemistries interacting and newly emerging stuff springing up all over the place. Parts can be sought and found and examined.

I changed your above idea significantly from how you expressed it. You’re right. One can imagine it exactly like you said, but forcing it into a sort of condensed “everybody . . .” doesn’t allow the examination of how these things work out in reality, how knowledge reverbrates out into the world. As I see it, you're treating "everybody" like a flat hypothetical, a monolith, when in reality it is a dynamic, active entity, with lots of moving parts and interactions. It's alive and busy all the time.

Mis-priced risk, I think, can be found pimarily in areas of worse knowledge and in the seams between better knowledge and worse knowledge. (Everyone knows this; I would like to examine it in more detail?) We can find these spots if we know where to look. Bond traders, for example, always look in the places where knowledge and risk may be misapportioned—and then buy or sell into it. I suspect many are very good at it. Bad knowledge, or inadequate knowledge, about an event or potential event reduces comprehension of risk, its derivative.

“Nobody expects it to happen tomorrow.” When you say this, I suspect you mean as nobody ‘us basically uninformed ordinary citizens that aren’t privy to the best knowledge available from our intelligence gathering agencies.’ Your ‘nobody’ as I see it has the same characteristics described in my rudimentary five levels of ‘somebody.’ A particular high level ‘nobody’ will receive “when” knowledge first, as the first in line part of the organism. You're right, he, the collective nobody may very well not have it today, but we can almost guarantee that when it is received, someone higher up will get it first and then pass it down. It will then be disseminated down the line in some fashion and each level acting on it in their appropriate way. The President will probably receive the information first, for example, about if and when China may attack in some fashion. (Your software attack post was an enjoyable read; what is war and what isn't and who decides, who makes the judgment?)

Knowledge is disseminated over time to ever larger groups of people, emanating from scientists first, then to others in a comprehensible pattern. (K. Popper, Taleb’s source for some of his ideas, said this, or very close to it, somewhere in one of his books that I read thirty-some years ago.)

?

I'm working on a better analogy for Ha; it’s important that I win him over in some fashion—or try. Thanks.

 

[unclemick]

When I hear of Taleb's Black Swan - I usually think of how you are going to kill and cook the buzzard - after he shows up.

Think Bernstein and his buddy Angus Maddison with total lost of governments, currencies , markets, last train leaving Berlin, etc, etc. Having met Chinese children whose parents left Red China and Vietnamese - hey had a plan sometimes vague(think hammered gold, jade, semiprecious stones) that went into effect as/after events unfolded.

Sort of my version of 'do the drill' - I knew the slosh model said the levees went at Cat 3 - so I always did 'the last train leaving Berlin bogey' - but the financial plan occured after that fact not before.

I remember those folks in the 70's with freeze dryed food, gold/silver bullion coins and a Lee Loader for their guns.

Hopefully any Black Swans today are catchible and cookible after the fact.

heh heh heh - valid passport and 6hrs 37.5 minutes to the Canadian border if you don't stop to eat.

 

[greg]

So, I'm starting to get the feeling that this filament of the thread is getting too frizzy?

Twaddle:

You said:

I won't disagree, but I'll try one more example. Imagine this headline tomorrow: "China Attacks US!" Everybody understands that the risk is there, but nobody expects it to happen tomorrow, and in no way is this risk reflected in any risk premium.

Who knows what this would do to the markets, but it probably would be ugly and prolonged. Anybody counting on historical returns or historical variance would be hurt badly. And, if you happened to have deep out-of-the-money puts on the S&P 500, you'd probably be a rich man tomorrow. Does that mean you anticipated the event or "looked" for that particular black swan?

I'll try to look at this differently. I agree with you that China could possibly hit us with an attack coming from left field that no one saw coming (hypothetically). What you are describing is pretty much what happened on 9/11 too (we knew a particular and fairly large group was trying to get us; we just didn't know when or where or how). We all ended up pretty well surprised , and the consequences were ugly and prolonged--especially because they were combined with the dot com crash. With a China event, the effects on the stock market would be different and the order of magnitude would also, as would many other things.

We can't know when or where or how an event might happen (I'm following your construct here, because I, personally, think we can partially know and look and anticipate). But we can certainly guesstimate the consequences, at least the initial ones of a big negative event. How this event mutates and combines with other elements after the event are much clearer to us and more obvious to see.

[As an aside, we really do--as a country--quite a bit of anticipating and searching for all Black Swans. We have the Dept. of Homeland Security busy, the CIA, the Pentagon, Border Security, and so on.]

Paraphrasing you: "if you had puts in place, does that mean you anticipated the swan?"

Maybe, maybe not. I guess you'd have to ask the fellow who made boat loads of money off his bet. He may have been betting against the dot com bust or some other more or less likely event he saw coming.

...................................................

My guess here is that Taleb in his books went thru the same problems mentioned here and many, many more. He came to the conclusion, I suspect, that one can't read folk's minds, either on the local level (the individual) or the general level (a large group). And if you can't, then you can only look at their behaviors. And if you can only look at their behaviors for evidence, then by necessity many events can only be seen at a much later point in time, oftentimes only right before the event. The magnitude can be greater too. Black Swans seem to pop from nowhere with this sort of thinking is my guess.

Technology has changed what we see, when we see it, where and how. We used to be able to see an army marching toward us many days, weeks, or months in advance.

I probably disagree with Taleb if I'm not putting words into his mouth about how I see him. I think we can really go into consciousness, into other folks' minds, and see things. But probably not in the way one might think. For example, we know that cell phone use in cars can easily divide the mind so that concentration on driving is impaired, and this increases the risk and probability of an accident. We pass a law so that, as best as we can, we prevent this sort of mental state in cars, e.g. no using cell phones while driving, pull over and stop or get a ticket.

Again, as I see things. God does not play dice with the universe. Everything is deterministic and follows rules. Nothing is random is my guess.

 

[unclemick]

So, I'm starting to get the feeling that this filament of the thread is getting too ---
Again, as I see things. God does not play dice with the universe. Everything is deterministic and follows rules. Nothing is random is my guess.

Perhaps - but I think we all have an - if I observe this, then I do that - even if it is buried in our subconcious. God does a better job.

I evacuated 7 times before number 8 and Katrina. And I still have a 10% interest in a non working gold mine joint venture from 1973.

heh heh heh - I did eat the freeze dryed food - and learned to love dividend stocks even tho Homestake cut theirs and pretty much went down the tube. I still have a shotgun for that stupid Black Swan - too gunshy for puts.

 

[twaddle]

Greg, when you sit down in a chair at dinner, you don't check to see if it will first hold your weight, do you? You know the laws of gravity are still in effect. You know it's possible the chair may fail. It's even possible that Martha has insider information about the screws she removed from your chair's legs. Yet, you still sit down without checking.

You do this because of repeated observations of success from past sitting events in that same chair. You have come to expect historical performance and historical variance, and you discount the possibility of chair failure to essentially zero.

The difference between chair failure and unanticipated events in the market is two-fold: 1) you don't fall very far when a chair fails, and 2) there is no mechanism to get paid large quantities of money when a chair fails.

The arguments about whether somebody had prior knowledge and determinism aren't as interesting to me as whether or not the payouts on the bets are truly asymmetric to the costs and how those payouts are captured.

Another question I find interesting is this: if I make a bet with a HUGE pay day, what happens if the guy on the other side of that bet can't pay? Is there any mechanism in place to ensure that somebody who sells a put has enough capital to cover his bets when he has to cover?