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How the Market Works

Hunt the Black Swan

Posted by kdadmin on October 14th, 2014.

Black Swan events are completely unpredictable, revolutionize the venue in which they occur, and are rationalized with hindsight after the fact as if they were not a surprise.

The truth is, you can hunt Black Swans. CNN will even help you, courtesy of their Fear & Greed Index, which supposedly measures “what emotions are driving the market now.”

CNN Fear Greed Index

Let’s consider that tagline: “What emotions are driving the market now?” How many times have you been told to rely on emotions to make investment decisions? Exactly none.

In fact, I always tell you to keep your emotions out of your investment decisions. So does every other professional investor worth their salt. However, the average person almost never follows this advice when trading stocks on their own. They will buy a stock for emotional reasons, like their grandfather owned it 50 years ago, or their kid likes the films produced by the company, or because the logo is pretty. I’m not kidding.

Wonderfully, these same people will also sell for emotional reasons, almost always when the market has recently tanked, and usually at deeply discount prices.

If, in contrast, you have kept your emotions in check, and are now the Black Swan hunter, you will look at the Fear & Greed Index and smell opportunity. You will realize that others are fleeing (selling) in reaction to various Black Swan events around the world (Ebola, Russia, Ukraine, IMF Global Economic Downgrade, QE3 ending). You will note the strong economic indicators in the US economy, and you will wait to pounce on discounted stock prices.

Or, I will, if I’m managing your portfolio.

Happy Hunting!
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