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Black Swans, 100 Year Floods

Posted By Barry Ritholtz On March 15, 2011 @ 7:22 am In Investing,Psychology | Comments Disabled

Every time there is a major crisis, I get asked “What should investors do Now?

My answer is always the same:

The time to look for the emergency aisles and where the exits are located is before takeoff, not after the wings fall off the plane. You must have a plan in place to deal with unanticipated events, a just-in-case things head south scenario.

Ideally, you put this plan together when you are objective and unemotional and calmly contemplative — not when things are figuratively and literally melting down.

The people claiming you cannot anticipate an Earthquake/Tsunami/Nuclear accident are missing the point: We can anticipate disruptive events, as they come along all too frequently in history. Consider the following list, via Doug Kass [1] of those 100-year flood/once in a lifetime events.  These occur far more regularly than most people believe:

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Black Swan events over the past decade

• Sept. 11, 2001, attacks on the World Trade Center and Pentagon;
• 78% decline in the Nasdaq;
• 2003 European heat wave (40,000 deaths);
• 2004 Tsunami in Sumatra, Indonesia (230,000 deaths);
• 2005 Kashmir, Pakistan, earthquake (80,000 deaths)
• 2008 Myanmar cyclone (140,000 deaths);
• 2008 Sichuan, China, earthquake ( 68,000 deaths);
• Derivatives roil the world’s banking system and financial markets;
• Failure of Lehman Brothers and the sale/liquidation of Bear Stearns;
• 30% drop in U.S. home prices;
•  2010 Port-Au-Prince, Haiti, earthquake (315,000 deaths);
• 2010 Russian heat wave (56,000 deaths);
• 2010 BP’s Gulf of Mexico oil spill;
• 2010 market flash crash (a 1,000-point drop in the DJIA);
• Surge of unrest in the Middle East; and
• Thursday’s earthquake and tsunami in Japan.

Do you have an emergency plan ready for when things get dicey . . . ?

Why not?

The time to do drills is before the blitz, not after.


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URL to article: http://www.ritholtz.com/blog/2011/03/black-swans-100-year-floods/

URLs in this post:

[1] Doug Kass: http://www.thestreet.com/story/11043072/1/kass-a-contagion-of-black-swans.html

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