The Beehive: Being Prepared for the Unexpected
Written By: Steven Fraley, CFA, MBA
Let’s consider some thoughts on investment risks and the fear of unknowns. This was prompted by Morgan Housel’s new book, Same as Ever, which I just had the chance to finish. As always, Morgan does a great job simplifying very important and often overlooked thoughts and concepts in a way that everyone can relate to.
Quote to think about: “We are very good at predicting the future, except for the surprises – which tend to be all that matter.” –Morgan Housel
Whether an investor, a teacher, an astronaut, or a janitor, there are countless moments in our lives that will direct us on our path forward, and most of these are out of our control. Reflecting on the events that have shaped the last 50+ years – the fall of the Berlin Wall, the rapid rise of the internet, September 11, the global financial crisis, Brexit, and, most recently, the COVID-19 pandemic and Russian invasion of Ukraine – it is evident that unforeseen events can have monumental impacts.
Distinguished author and Professor of Risk Engineering at New York University Nassim Nicholas Taleb authored a series of essays on uncertainty between 2001 and 2018. In his most famed publication, The Black Swan, Taleb explores the concept of what he calls “black swan events”: unexpected, rare, and high-impact occurrences that defy traditional logic or prediction. He emphasizes the importance of acknowledging uncertainty and being prepared for the unexpected by reevaluating one’s understanding of risk, randomness, and the limitations of human knowledge in the face of unforeseen events.
Here are a few key takeaways from the book:
Black swans are always unexpected and often defy conventional expectations.
Never try to explain the future by looking at your past; it is typically a bad indicator.
Be skeptical of predictions and adopt a mindset that embraces uncertainty.
Favorite quote: The problem with experts is they do not know what they do not know.” – Nassim Nicholas Taleb
While applicable to almost any industry, this is particularly true in the world of economics and investing. It highlights the challenges of relying too heavily on experts, their predictions, and past events. When experts claim to have a comprehensive understanding of economic or market dynamics, they might be overlooking the inherent unpredictability and the potential for rare, high-impact events (black swans).
Recognizing the inevitability of risk, even in unexpected times, is crucial for better preparation. In investing, this perspective encourages a forward-looking approach, embracing diversification, prudent risk management, and an acknowledgement of the limits of prediction. As German philosopher George Hegel, wisely stated, “We learn from history that we do not learn from history.”