The world waits with bated breath on how the Trump presidency will play out. There are protests, recriminations, gloating. Following closely on the debacle that was the Brexit polling, the ‘predictions’ about the U.S. election beg a question: how did the pollsters get it so wrong? Similarly, and closer to home, hardly anyone predicted the passing of the interest-capping bill. Enter, the “black swan.”
A black swan, popularized by Nassim Nicholas Taleb, is an event that:
- is a statistical outlier
- produces extreme change
- seems easily predictable in hindsight.
For those of us in investing, analytics, or any field that relies on statistical models, recent events should warn us that models are fallible. Indeed, investment disciplines like portfolio theory, risk assessment, and the pricing of derivatives, all rely on models that Mr. Taleb argues completely fail to account for both the probability and the effects of black swans. Faced with a reality in which the impact and frequency of black swan events seems to be increasing, what is an investor to do?
As always, age-old tenets offer some direction. Diversification, cost averaging (not attempting to ‘time’ the market), and establishing a margin of safety (not overpaying for shares) should limit the effects of black swans. At Mwamba Capital, we have actively employed these principles throughout our collective 30 years of experience. We welcome enquiries related to investing at the NSE–regardless of your opinion on Donald Trump.