Fooled by Randomness…

That, of course is the title of Nassim Taleb’s 2004 work about the role of luck, or the ‘black swan’ random events that come along and change the markets when no one is expecting ‘it’ to happen.  This philosophy of   investing has gained some form of mainstream thinking the past several years as markets have been extremely volatile along with some very strange and unexplainable events, such as the ‘flash crash’ in May of this year.  These events have hedge fund and money managers in general re-thinking the role of chance in investing.  With so much doom and gloom out there right now, investors are left searching for returns.

Bear markets are no stranger to volatility as uncertain times bring uncertain trading patterns from investors.    Today, more than anytime in history, there are more traders out there adding volume to the uncertainty from hour-to-hour and day-to-day.  Unfortunately, we are still in a bear market.  Add to that, we may be in for deflation ala the Japanese, although it’s hard to imagine no inflation when a coffee and a bagel costs over $3.15 at Dunkin’ Donuts.  Buckle up for another down draft in the stock market as this stimulus stimulated economy is not yet ready to grow on her own.   September is the cruelest month for stocks and investors are not ready to take any more bad news.  Perhaps Washington should start to stimulate jobs growth instead of saving banks and trying to get folks to spend money they don’t have right now.

Adding to the doom and gloom, there is also a sense of urgency today.  Baby boomers who thought they were on easy street in 1999 are now faced with the dreaded thought of no retirement at all.  A common cry these days, and for the past 10 years has been, “I lost 50% of my 401(k)!!”  But the question remains, were the high water marks on statements really theirs to begin with?  I didn’t see too many people going to cash in 1999, did you?  Perhaps greed turned out to be ’no good’ Mr. Gecko. Individual investors are searching for the next great ride.  Will it be in the stock market, commodities,  bonds, currencies, real estate or tulip bulbs?  The fact is that folks love a good bubble just as sheep love to follow other sheep.  Whether we care to admit it or not, the most money any generation makes is through an asset bubble of one kind or another and we just happen to be along for the ride.  Tell me how smart folks were in the 70’s for buying their homes in the 50’s and 60’s and selling with 500% gains (weren’t 20% interest rates and high inflation a ‘black swan’ event?).  Tell me how smart folks were in the 90’s for ’investing’ in companies like pets.com and other assorted nonsensical businesses with a dot com after their names, for absurd profits, that had no real business model at all.  Fooled by Randomness?  More like randomly lucky fools.  So is that what it takes?  Is that what investing is?  Pile on whatever seems to be going up and hope everyone else does too for a decade or so?  It all starts with a black swan and the money follows.

Maybe we as investors are spoiled.  We have come to expect asset bubbles after the events of recent years and are desperately searching for the next one hoping to get on and ride and make that ‘easy’ money.  I am not sure we have the collective patience to ride out this bear market with the short term investment thinking our society has today because, after all, ‘time is money’.  Be patient, the black swan is coming, let’s just recognize it for what it is when we find it this time around.