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Smart Investor: why you shouldn't worry about 'grey swans'

You can't predict the outcome of the European debt crisis or tensions in the Middle East, so put them out of your mind when buying shares, Smart Investor says.

Smart Investor: why you shouldn't worry about 'grey swans'

Sir Martin Sorrell’s discussion of what he considers to be the ‘four grey swans’ looming over the horizon made for an interesting (if entirely unhelpful) read in advertising and marketing company WPP (WPP.L)’s recent interim management statement.

As the chief executive explained, the European debt crisis, tensions in the Middle East, the slowdown in China, and the health of the US economy are all events which are known about, but whose eventual outcomes are unknown. As Donald Rumsfeld phrased it they are the 'known unknowns'.

So, according to Sorrell, it is these four issues that could cause major difficulties for WPP's trading in the year ahead. However, their severity – and whether or not they will even occur or cause problems – is impossible to accurately judge.

Although such discussion is interesting, it is wholly irrelevant for investors.


We could spend the rest of our lives mulling over whether China is going to experience a soft landing, a hard landing or no landing at all. We could debate who is going to win the US presidential election and what impact this could have on the US fiscal cliff and budget deficit. If we really wanted to, we could even discuss whether or not the OMT plan announced by Mario Draghi is the beginning of the end of the eurozone crisis.

However, such pontificating is simply a waste of investors’ time.

It may sound impressive to ‘take a view’ on a known unknown or ‘make a call’ on issue X, Y or Z. Furthermore, deciding whether or not to invest based on such views may make you feel more confident about your actions and, if things start to move in a different direction from the one you'd hoped for, your viewpoint may provide you with some comfort when the investment world suddenly feels very, very cold.

The intrusion of 'unknown unknowns'

However, to try to predict the future is a dead end, and you will simply not be able to do so on a consistent basis. This is because although there are ‘grey swans’ there are also ‘black swans’ which are, going back to Donald Rumsfeld’s descriptions, the ‘unknown unknowns’. In other words, risks that are not on the radar of 99.99% of investors.

Examples of such events are 9/11, a sudden default on debt payments by major governments and Lehman Brothers going bust. Such events, although possible to imagine, are not considered to be at all likely, and hence are not factored into the decision-making process of the vast majority of investors.

Furthermore, the day before a black swan event will, by its very nature, offer no guidance that such a major event will occur. For instance, the world probably seemed perfectly normal on 10 September 2001, and the idea that the events of 9/11 would occur the very next day would have seemed absurd had it been suggested.

How to ignore the swans

Attempting to predict the outcome of certain events and, to all intents and purposes, trying to predict the future is not an effective investment strategy. Even if you are able to successfully identify all of the grey swans (as Sir Martin Sorrell believes he has) there will always be black swans for which you cannot prepare.

No man has ever been able to accurately and consistently predict the eventual outcome of grey swans.

So, why not save yourself the bother and buy quality companies at reasonable prices, cost averaging to ease the pressure on finding the peaks and troughs?

3 comments so far. Why not have your say?

val walmsley

Nov 03, 2012 at 16:35

This Sorrell is a odd duck talking about grey swans.

He always seems to miss WPPs projections- often by a great deal- but has no problem sharing his insigths about the global economy.

Grey swans indeed.

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John Bourke

Nov 04, 2012 at 17:38

This is really sensible advice.

At any time in the past there have also been loads of "grey swans" so trying to take account of these issues also involves assessing how grey is the sky...

A reasonable spread across one's asset allocation is important too of course. I do think the various grey swans currently add up to an argument for a relatively greater weighting towards sustainable dividend yield equities.

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Geoff Downs

Nov 04, 2012 at 18:13

If you don't mind losing money then I suppose it's sensible advice. Remember though stock markets always depend on new money coming in to reward the original investors. At some point a whole raft of investors lose money as others bail out.

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