Black Swan
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Black Swan
Max Mon Jan 24, 2011 11:54 pm
OK, saw this movie last night. It was actually pretty good for a movie about Ballet. Corruption of innocence. Struggle for perfection, beauty in imperfection. Hot lesbian make out scenes. Movie has it all.
Anyway, the title reminded me of the black swan of investing literature, which refers to the random, unpredictable, and devastating consequences of the unexpected. The particular books I have read on the subject seemed to suggest that forecasting is impossible, computerized models are evil, and we should all go back to just using gut instinct to value a stock. While I disagree on the ridiculous conclusion, the argument is a welcome slap in the face to my recent obsession with trying to convert my investing process into a formula. There must always be a common sense reasonability check. I have been caught many times in my modelling at work with some erroroneous number way out of the normal range. If I had only taken a brief look at the overall results, it would have stood out immediately, but I trusted too completely in my formulas to notice the error.
Anyway, the black swan theory is something to consider. Should we plan for something we, by definition, cannot predict? How do we overcome this problem? Should we give up? The thing to keep in mind is that while the markets are unpredictable due to the unmanageably large number of forces at work, they are not random. There is a pattern. Modelling will not provide a foolproof solution, black swans still exist, but there is still a need to identify the components of a stock's valuation. As always, there is a need for balance and moderation even when you are trying to develop a mathematical model to control the universe.
P.S. The black swan term came from researchers believing for a long time that black swans did not exist. Until they found one. Pretty weak example, but these must have been philosopher-scientists that really, really saw a lot of meaning in mundane things. From this they had the epiphany that sometimes life will throw random events at you that you could not possibly predict. There is no way to model these things, and you just have to deal with them as best you can.
Anyway, the title reminded me of the black swan of investing literature, which refers to the random, unpredictable, and devastating consequences of the unexpected. The particular books I have read on the subject seemed to suggest that forecasting is impossible, computerized models are evil, and we should all go back to just using gut instinct to value a stock. While I disagree on the ridiculous conclusion, the argument is a welcome slap in the face to my recent obsession with trying to convert my investing process into a formula. There must always be a common sense reasonability check. I have been caught many times in my modelling at work with some erroroneous number way out of the normal range. If I had only taken a brief look at the overall results, it would have stood out immediately, but I trusted too completely in my formulas to notice the error.
Anyway, the black swan theory is something to consider. Should we plan for something we, by definition, cannot predict? How do we overcome this problem? Should we give up? The thing to keep in mind is that while the markets are unpredictable due to the unmanageably large number of forces at work, they are not random. There is a pattern. Modelling will not provide a foolproof solution, black swans still exist, but there is still a need to identify the components of a stock's valuation. As always, there is a need for balance and moderation even when you are trying to develop a mathematical model to control the universe.
P.S. The black swan term came from researchers believing for a long time that black swans did not exist. Until they found one. Pretty weak example, but these must have been philosopher-scientists that really, really saw a lot of meaning in mundane things. From this they had the epiphany that sometimes life will throw random events at you that you could not possibly predict. There is no way to model these things, and you just have to deal with them as best you can.
Max- SDDL Insider
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