Shades of Black (Swans) | Value Research Expect the expected is common, this is about the unexpected unexpected
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Shades of Black (Swans)

Expect the expected is common, this is about the unexpected unexpected

Black Swan theory was made famous by Nassim Taleb, who said that “a million sightings of white swans does not prove that all swans are white, but a ‘single’ sighting of a ‘black’ swan proves that all swans are not white” (emphasis mine). It refers to how individuals (and that includes crowds) often get ‘surprised/shocked’ with the consequences of what they had not expected, and how ‘systematic’ this shocking experience was.

Add to this observation the fact that crowds have different behaviours, different capabilities and (simply) different identities from what we have as individuals, and you get the contours of a whole new theory. It is possible for crowds/markets to systematically get shocked by “black swan events”, even as individuals are at least partly prepared for them.

John Mauldin describes it beautifully. He calls it “the lion in the grass”, as opposed to the Black Swan. If you are crossing a large stretch of elephant grass in the African Serengeti, you should not at all be surprised if a lion jumps out at you. If you are a practised crosser of elephant grasses in that area, you would quickly learn to “expect the unexpected”. That would offer you good training to operate in the Indian equity markets.

But to get back to the point. Since a crowd has no memory, it is unable to build a historical association with the elephant grass, and the occurrence of browsing lions if you should dare cross through it. But individuals can (build such associations) and avoid getting stampeded by the departing crowd as it refuses to learn.

It is really a little twist in the tail. A normal statistical study of charts throws up a “black swan” event as a statistically anomaly, divides it by the universe of observations and comes to certain conclusions. Those conclusions have themselves been earth-shaking for the average student of the “normal bell curve”, and hence you get the concept of the fat tail. But go a little deeper and you find that it is possible to distinguish between “the expected unexpected and the unexpected unexpected”. A deeper understanding of this would considerably change the nature of the fat tail; what is a fat tail to the crowd/ markets, may actually be a trading strategy for an innovative individual.

I know that Nassim Taleb himself worked in a Hedge Fund that set aside most of its money to “trade against the Black Swan”.

To repeat, the meaning of “expected unexpected” means that it is ‘expected’ (and hence predictable) to the individual, but remains ‘unexpected’ to the crowd/ market. The overhang of negativity about Infosys may start with a kernel of truth, but builds up through “Groupthink”, or crowd behaviour, till it reaches a crescendo. The media feeds on this, coming back to the same issue again and again, and repeating different aspects of the same story and presenting it as new stories. That is how the (media) business is structured, and it is not going to change.

The net result of this repeated bearishness is that if you happen to come into the theatre at any point in time, you will find a recurring theme being parroted, like a Buddhist chant. The whole polity gets focused into thinking in one direction (another law of Groupthink) through repeated parroting, till the actual events are no longer important, the parroting is:
* Infosys is doing badly...
* Oh, and Convergys has also revised its projections down; hence, Infosys is doing badly....
* Infosys is sacking people. So is everybody else, but Infosys is also doing badly....
* Infosys has delayed hiring. So has everybody else, but Infosys is doing badly....
* Infosys has cases in the US. It is doing badly....

Then, suddenly, oh! Infosys has actually grown, and next thing you know, the stock is up 20 per cent.....and then down 30 per cent, or whatever.

The point is, the build-up is obvious to any perspicacious observer, but who has any rationality these days? The same thing is going on with Tata Steel just now, and you will witness another whopper of a movement sometime in the future. In hindsight, it would have been fairly predictable, but only to the person who can ‘see’ the lion in the grass.

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