The Dangers of Trading Headlines

In 2007, author Nassim Taleb wrote his very interesting book, "The Black Swan," the theme of which is that the impact of rare events is huge and highly underrated. The idea behind the entire premise of the book is that these events are rare, In previous entries I have opined about the dangers of 24 hours on investment markets. The media have a profound affect on behavioral finance, and it is our individual ability to filter the media which potentially makes us successful investors.
With the recent events in the Middle East, and the earthquake & tsunami in Japan, combined with the financial events/turmoil of the past few years, the term “black swan” is being kicked around more and more, and the label is being placed on many things. I even read an article noting that “black swans were becoming a more common occurance.” This is just irresponsible journalism.

There are geopolitical, natural, social, & financial “events” that happen every year, and it is in the ability to manage those risks that we see financial successes or failures. To name a few of these events over the past several decades:


2000s

• Oil Shocks (2005)
• Corporate Accounting Scandals (2002)
• 9/11 (2001)

1990s

• Tech Bubble Bursts (1999)
• Bosnia-Balkan Crisis (1995)
• War in the Persian Gulf (1990)

1980s

• Savings & Loan Crisis (1989)
• Chernobyl (1986)

1970s

• 3 Mile Island (1979)
• Watergate (1974)
• Vietnam War spreads to Cambodia (1970)

If pressed to, I bet that I could use this loose description of a black swan to name an event every year going all the way back to the 1920s. The point of Mr. Taleb’s book (and it is a great read), is that we cannot mentally grasp or predict the type of event that a black swan is; and therefore cannot plan for it.

As individual investors, it is sometimes difficult to divorce or emotions from our investment decisions. “Media Events” can contribute to these poor decisions. Consequently, we often give in to the emotion of selling low and buying high.