This blog is written weekly by Dock David Treece, a registered investment advisor with Treece Investment Advisory Corp. It is meant to share insight of investment professionals, including Dock David and his father, Dock, and brother, Ben, with the public at large. The hope is that the knowledge shared will help individuals to better navigate the investment world.

Sunday, January 18, 2009

Black Swan event isn’t pretty

The events leading to this financial crisis, in retrospect, appear to be something of a perfect storm. When examined individually, they seem relatively probable, but for all to occur in such conjunction as to cause the meltdown that we’ve witnessed, the probability is infinitesimally small. Before their occurrence, these events weren’t thought by possible by most people. In fact, they weren’t even conceived of. This is the definition of a Black Swan event. For those unfamiliar with the term, it is discussed at length in Nassim Taleb’s new book, “Black Swan: The Impact of the Highly Improbable.”

Fitting Taleb’s definition of a Black Swan, at the beginning of this crisis people underestimated the impact of negative events. Everything was downplayed as simply a pause in the upward trends of the stock market and broader economy. Now that most of these events have played out and their impact has been felt, many journalists and so-called professionals are extrapolating recent downtrends indefinitely into the future. The fact is that Black Swan events are typically years in making and, once a threshold is crossed, have quick, significant impacts.

We must remember the extreme improbability of events in recent months ever occurring. Now that we’ve seen this sequence of events once, it is even less likely that we will see the same, or even similar, events unfold. And while they may sometime way down the road, it almost certainly won’t happen again, not in the lifetime of anyone who remembers this latest financial crisis. However, it is important to recognize the self-fulfilling prophecies that may come to pass out of fear.

The government can invent bailout plans forever, but the only thing that is going to get us out of this mess is confidence. Confidence that you aren’t going to lose your job and that we aren’t going into a depression; and once banks share this confidence, they will have the assurance they need to lend money so the financial system can get moving again. All of this is admittedly hard amid the recent news, which is almost enough to put a person in therapy. The only thing we can do is have faith, count our blessings, and keep on keepin’ on.

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