Sunday, April 09, 2023

Black Swans & Shorter MLB Games

In my day job email junk folder was an email with the subject asking if you were ready for the next black swan. Black swans are a fascinating topic and a lot of people do not understand what the term means. A list of the "10 likeliest black swans" is the type of headline you see every so often and of course they are not listing potential black swans, they are listing potential, kind of widely known risk factors. Black swans are events that are not reasonably predicted by many people. Was the pandemic a black swan? Some people had been calling for some sort of pandemic for a while, I don't know why anyone thought there might be a pandemic but it happened and seemed to surprise a lot of people. What about the supply chain disruption during the pandemic? Was that a black swan? Again, I don't know.

Most of us probably don't need to try to guess what sort of adverse event or calamity might come as opposed to generally protecting against that adverse event or calamity. Where the stock market is concerned, how much does it really matter what caused some sort of big decline so much as it happened and if you try to protect against such things, did your strategy of protection help at all? 

Russia invaded Ukraine. Markets had a slow, steep decline. The pandemic was declared and stocks crashed and snapped back pretty quickly. Do you even remember why stocks crashed in late 2018? Do you remember the Taper Tantrum or the drop that coincided with the last time we flirted with the debt ceiling? Those events all happened, black swans to you or not, and stocks had some sort of drop. There will be future events that result in some sort of drop, black swans to you or not, and these become more important as you get closer to retiring in terms of sequence of return risk. Sequence of return risk can be mitigated by raising cash ahead of time or using tools that should go up when stocks drop as ideas we've talked about before. The important thing though is not what causes stocks to drop but how you mitigate the consequence. We know that every so often stocks go down a lot a scare the hell out of people. That will repeat in the future I promise you that. I  have no insight on what might cause future declines, I don't think it matters. I could guess, maybe be right, probably be wrong but can be wrong and still effectively protect against something like sequence of return risk. I think that's important to understand. The why doesn't matter <repeated for emphasis>.

It is also important to be resilient in real life too. I write about having a Plan B and for a short time earlier this year I had to confront whether I might need to pursue or implement my Plan B. I talked about this yesterday. At the demographic level, people who are 50 or 60 face unexpected job loss all the time. My call with this probably wasn't that close but it could have been. The behavior was a black swan to me, I was Taleb's turkey (Black Swan reference) in terms of expecting anything but prepared against the unpredictable. My Plan B was about losing my income not isolating a specific event. There's a direct corollary to the example above with the stock market. You don't need to guess what might cause a large decline 15 months before you plan to retire, you just need to be prepared in case it happens.

Because I think it is related, I saw a Tweet from someone who doubted that the typical 401k saver would have enough for their retirement just from their 401k. Not that people can't accumulate enough but that in his opinion, just having a 401k and nothing else won't be sufficient. 

The idea that people in the demographic sense won't have enough for their retirement by only having a 401k and nothing else is not a black swan. Any individual though might have the impression they are on track at 45 or 55 or 60 or whatever and then get to their retirement and realize they don't have enough (maybe they are the turkey in Taleb's context) or maybe they are all set but then some sort of real black swan happens to them, something unforeseeable that ends up being very expensive to solve. 

Any retirement plan runs the risk of coming up short for any number of reasons. Behavioral reasons can be mitigated by adjusting to a proper asset allocation before there is some sort of calamity in the market and/or making sure you have enough set aside in cash to meet x number of months' of expected withdrawal needs where x=whatever number lets you sleep at night. On the behavioral front we should also include training yourself not to panic sell if there is a large decline. Repeated from above, I promise you there will be future declines in markets and one or two of them will be huge. But then, at some point, the market will go back up. That will repeat no matter what you do so you might as well accept that reality which should greatly reduce the odds of panic selling. You know a huge decline will come, you just don't know when, maybe not for many years but at some point because that is what markets do. 

We cannot reasonably predict when those declines will happen. Yes, over the course of an investing lifetime you might get a couple right but being reliably right is improbable. 

And for fun, what do you think about shorter baseball games? I think the average game has been shaved off by 26 or 27 minutes due to the pitch clock. I guess people wanted shorter games. I love baseball, there's no such thing to me as a game being too long. During the season I have a game on as kind of background noise while I do my various work routines. It's there like a quick Pomodoro Technique, I can take a break to pay attention to an at bat or look up when the play by play's voice escalates. I'm doing that today. After hiking early, I have the Blue Jays Angels on, watching with one eye after watching the Red Sox Tigers earlier and then maybe a little Padres Braves at 4. One game running into another as I do my thing is pretty enjoyable.

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