If you haven’t already heard about Dr. Michael Burry, the prominent hedge fund manager who ran Scion Capital and posted huge gains from his bets against the credit markets; be sure to read up about him on Wikipedia.
Today, I just want to highlight something critical that I learned about Black Swans while reading up on one of Burry's investor letters since I found it quite fascinating. Burry stated that a ‘Black Swan’ in the economic / financial sense has three basic features:
- Its unpredictable
- Carries a massive impact
- And after the fact, most people find an explanation that makes it appear less random, and somehow justify that it was highly predictable
Burry was once travelling on an extended vacation trip with his family and saw real life black swans. He couldn't believe it at first, but just like everyone who tries to justify and make things look less random after, he realized that he should have known about the flock of black swans that reside at castle of Leeds in Kent, and if he'd looked it up or had done some research about where he was traveling, it would have been obvious to him, and not unpredictable at all.
But the problem is that such events are always explainable in hindsight, but can never be foretold by history.
A common problem with people is that they tend to focus on what conventions say can be calculated, and they tend to miss the uncalculated and untimely aka Black swans.
At the end of the day, those with the most unconventional view end up on the winning side of the trade. In a group of average investors, many foresee a decline in the value of the assets, but when they realize that those were terrific companies not so long ago, their greed of missing the bottom kicks in, and they eventually get punished for this bias.
So there's two things to be learned from Burry here. Firstly, don't try to justify that a black swan could have been predicted. If it could have been, you already would have and profited from it.
And secondly, if you were to ever bump into Burry in California someday, don’t bother asking him – “Do you see another Black Swan coming?” Because his answer would be plain, simple and always the same –
“Damn birds fill my skies.”
Read more: Scion
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Why would I ever listen to someone with your ethnic username?
nassim nicholas taleb is already pretty widely credited with this term since he wrote a book called "the black swan" that is literally this exact idea. even down to the 3 requirements
Agreed, Taleb is widely credited for talking about Black Swans, but like Burry mentions in his note, the concept existed well before it became common knowledge via Taleb's book.
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