Wednesday, August 3, 2011
Wild Horses And Black Swans
These are the things we suspect might go wrong. What really worries me about our future is the unknown that might jump up and bite us. Things that are not only unpredictable but are counter to anything we might expect.
I grew up on a small farm where we harvested a bit of grain, planted a lot of trees and even raised some livestock. But the understated purpose of our little operation was always horses.
My dad grew up where horses provided the power, and he loved them. He took my older sister under his wing at a very young age, and by her early 20s she was on the Canadian Olympic Stadium Jumping Team — no small accomplishment.
My two older brothers also rode. And we had a hired man, Jonesy, who was good with horses.
I tell you this not to brag, but to underscore just how much experience and horse sense we had at our little operation. Yet despite all of it, a bolt out of the blue happened one morning in the early 1960s.
We kept a stallion in an 8-foot fenced private paddock. Each year, we would breed him to one of the mares. One spring, a mare had a foal, a sprightly chestnut colt.
There was also a fenced pasture that ran parallel to the stallions and held the mixture of our other mares and geldings. Both pastures led down to a pond at the bottom of the slope.
One morning, my dad and sister decided it was time for the colt to stretch his legs. With mother in halter, they were taken into the common pasture and walked down to the pond to drink.
Now, horse people know that you can’t keep a strange stallion around a colt; he will kill it. I suspect that knowledge goes back to Mongol times or even before.
What was also known (or thought to be known) is that a gelding, having been castrated, would lose the stallion within him — the compulsion to kill a colt. Colts are thought to be safe around geldings.
That holds true, but not for a gelding named Redskin. He snorted, pawed at the ground and made loud huffing noises. Then he sprang, charging down the pasture and straight toward the colt.
I can still hear that broadside crash of Redskin driving the colt into the water. And despite protests from my dad, my sister and even the trainer, Redskin had only one thing on his mind — to drown that colt. Its mother bayed and tried to block the charges but was brushed aside by the bigger horse.
The colt was shaky and weak. The end came quickly. Something that should never happen had just happened — a gelding had purposefully killed a newborn.
There were a lot of tears that morning, but what I remember most was my dad’s consternation. “Damn it, Jonesy, what we just saw shouldn’t have happened.”
This story from my past came to me one night while reading The Black Swan: The Impact of the Highly Improbable, by Nassim Nicholas Taleb.
What Taleb writes is that just because we have not seen something does not mean that it does not exist. But since in our mind it does not exist, we have no way to anticipate it, much less prepare for it.
“Before the discovery of Australia, people in the old world were convinced that all swans were white, an unassailable belief as it seemed completely confirmed by empirical evidence,” writes Taleb. “The sighting of the first black swan might have been an interesting surprise for a few ornithologists (and others extremely concerned with the coloring of birds), but that is not where the significance of the story lies. It illustrates a severe limitation to our learning from observations or experience and the fragility of our knowledge.”
To Taleb there will always be black swans, impossible to predict because we can’t even conceive of them in our minds. He goes on to write that World War I, the rise of Hitler, the market crash of 1987 and 9/11 are “Black Swans.”
Taleb also says there is no way to predict them and since they have the biggest impact on society and the economy, predictions from government, scientists and economists are a waste of time — time in the writing of them and time in the reading of them.
“Go ask your portfolio manager for his definition of ‘risk,’ and odds are that he will supply you with a measure that excludes the possibility of the Black Swan — hence one that has no better predictive value for assessing the total risks than astrology,” writes Taleb.
But Taleb doesn’t throw up his hands. He says we can protect ourselves against the next Black Swan. How? Well, for the rich clients he used to work with on Wall Street, derivatives offer good protection.
For us ordinary folks I think the best — in fact, the only — protection we have from a Black Swan event is gold.
Action to take: Gold has topped $1,600 per ounce, almost twice the price it was when I started recommending it to Personal Liberty Digest™ readers two years ago. Yet given the amount of money that has been injected into the economy by the Obama Administration, plus growing world restlessness, I believe bullion will top $2,000 per ounce within the next year. A Black Swan event might take it toward $3,000 per ounce. Therefore, I urge that you continue to accumulate physical 1-ounce gold coins. My two favorites are American Eagles and South African Krugerrands.