Was It Or Wasn’t It?

Black Swan events are unusual events that occur much more frequently than we would expect when assuming a standard, normal, bell shaped, Gaussian probability distribution. A Black Swan event can be favorable or unfavorable.

I have identified the last few years of the 1990s as a favorable Black Swan event. Returns fell well outside the norm based on standard historical projections. You can see this using the Stock Returns Predictor at Year 10.

By another standard, the 1990s run up fell well within expectations.

I see such run ups often when using the Scenario Surfer. They occur about 5% of the time. This is far more frequently than with a Black Swan event.

The Scenario Surfer is a Monte Carlo model that fills in the gaps. It projects the full range of possible outcomes. Used properly, it can allow us to identify and prepare for risks.

The October 2008 meltdown was NOT a Black Swan event. In fact, such events are quite common. It fell well within the range of expected outcomes as shown by both the Stock Returns Predictor and the Scenario Surfer. Meltdowns are almost certain to occur at some point along the way when starting from a high initial valuation.

Have fun.

John Walter Russell
May 10, 2009