The first was a profile of a money manager in Barron's named Stephen Cucchiaro. The article was titled Looking for Black Swans which stemmed from a Black Swan that Cucchiaro endured when he made the 1980 Olympic sailing team which of course never competed.
An Olympic boycott would seem to have a good chance of meeting the definition but even if it doesn't I can believe it came out of the blue for Cucchiaro and has gone on to influence him in his career.
My take is that Black Swans cannot be reasonably predicted so the idea of looking for them would seem to be difficult. Owning a couple of things like gold and a defense contractor would seem to be a way to mitigate against quite a few Black Swan with out of course ever actually predicting one.
One type of black swan-ish event is something unforeseen that is caused by another event. For example could the volcano in Iceland domino into something unforeseen? It is just an example.
The idea of a little protection makes sense to me but I would also say that figuring out what to avoid is also a very important portfolio dynamic. I've been talking about this a lot lately and I think it is crucial.
Cucchiaro made another point that is similar to something I have said in the past. He said that "too many investment professionals equate risk with volatility." I would add that many individual do the same thing. Assuming a proper asset allocation and time horizon and index fund of some sort cutting in half in a year like 2008 is more of an expression about volatility not risk. If you lever up to buy a lottery ticket biotech stock ahead of the FDA you are taking a risk.
Constructing a portfolio and then navigating through a cycle entails assuming proper risk levels and a suitable amount of volatility. In a "normal" diversified portfolio a little risk is suitable. Putting 2% into a lottery ticket of some sort (biotech, junior miner or something else) that does not work out is not a ruinous event.
It is not that difficult to build a portfolio that by design is more volatile or less volatile than the market. If you go the more volatile route, make no changes and the market cuts in half you are going to go down a lot but that doesn't necessarily expose you to undue risk. As a very simplistic example an equity portfolio that is 50% SPY and 50% EEM would have gone down about 46% in 2008 versus 40% for the S&P 500 (the actual dates on Google finance are Jan 4, 2008-Dec 26, 2008). So while this would have been more volatile there was no reasonable risk of either fund going to zero.
Hopefully it is obvious that the wrong asset allocation and or time horizon assumption is a risk. Learning after a big decline that you had too much in equities such that you sell at the bottom is a big problem.
The other article was written by Charles Hugh Smith with a blunt observation about what the loss of home equity means to most people. The money quote;
In effect, there is no inheritable wealth left in most mortgaged homes. Many homes have negative equity--they are worth less than their mortgages--so perhaps the equity in some of the 51 million mortgaged homes is higher than 6%.
Nonetheless, a quick look at the chart reveals the awful truth: inheritable wealth held in household real estate has plummeted from 70% of total value to 38%. In essence, only those households who own valuable homes free and clear have any wealth to pass on to their offspring.
That matters, because most U.S. households hold no appreciable wealth beyond their homes.
Read the whole article.
When asked I always used to say there is no question that investing is preferable to paying off the mortgage (as differentiated from paying a little more every month) but then had to disclose that we paid off our mortgage fairly early in life. It has always been a sleep factor thing, IMO, but it is tough to say now that "no question" applies anymore.
Wildfire season is close to starting.