John Cheshire shares his experience and thoughts with the current fear of subprime loans:
So the phone is ringing and they want to know our exposure to the subprime crisis and potential fallout. So how do you tell them that you don’t know and they won’t be able to find out either? Running through scenario analysis will be helpful, but probably won’t catch where the real problem will appear. If you are aware of it then it probably isn’t the thing that is going to get you.
One of the most significant works in the last few years for investors is Nicholas Nelson Talebs pair of books, “The Black Swan” and “Fooled by Randomness”. What happens next is completely random and your ability to accurately predict the out come of an event is really nil. For money managers or risk managers these works are must reads.
If you agree with the multiple mental modeling concept proposed by Charlie Munger and espoused by Bill Miller and Mike Mauboussin at Legg Mason, then the concept of randomness and the unknown and recklessness of fate are powerful models to add to your collection. Poking holes in our traditional analysis and attempt to model complex systems, the concepts are both thought provoking and entertaining.
So where are the rich mathematicians? If our traditional mathematical and statistical modeling work so well then how come they aren’t predictive? Why is the study of stoicism maybe as applicable to managing money as balance sheet or cash flow analysis? Or why we might need to fall back onto many mental models as no one individual model can accurately capture the true workings of the most complex of systems?
We simply cannot guess outcomes, or predict the unpredictable. The terrible tragedy of September 11th was an unpredictable event. Much as portfolio insurance in the correction of 1987 it wrought upheaval in our markets. That upheaval would happen was predictable, what caused it was truly not. Who could have supposed that terrorists and airplanes would close our financial markets and paralyze our nation? It is doubtful that the specific event will ever happen again, but there will be unpredictable events and market corrections.
So as we weather the turbulence in the markets and listen to the banter of market pundits, remember that we don’t know nor can predict the outcomes. It may well look very clear and logical once it has unfolded, but using clarity and logic won’t predict the outcome. We may well be looking in the wrong places or at the wrong things.
So how will the subprime lending crisis play out? It may well go far beyond the lenders and be a very long tailed event. It could also be a non event and just the current focus of the media and market participants. The one thing we know for sure is that it will create investment opportunities for those who are prepared.
So the phone is ringing and they want to know our exposure to the subprime crisis and potential fallout. So how do you tell them that you don’t know and they won’t be able to find out either? Running through scenario analysis will be helpful, but probably won’t catch where the real problem will appear. If you are aware of it then it probably isn’t the thing that is going to get you.
One of the most significant works in the last few years for investors is Nicholas Nelson Talebs pair of books, “The Black Swan” and “Fooled by Randomness”. What happens next is completely random and your ability to accurately predict the out come of an event is really nil. For money managers or risk managers these works are must reads.
If you agree with the multiple mental modeling concept proposed by Charlie Munger and espoused by Bill Miller and Mike Mauboussin at Legg Mason, then the concept of randomness and the unknown and recklessness of fate are powerful models to add to your collection. Poking holes in our traditional analysis and attempt to model complex systems, the concepts are both thought provoking and entertaining.
So where are the rich mathematicians? If our traditional mathematical and statistical modeling work so well then how come they aren’t predictive? Why is the study of stoicism maybe as applicable to managing money as balance sheet or cash flow analysis? Or why we might need to fall back onto many mental models as no one individual model can accurately capture the true workings of the most complex of systems?
We simply cannot guess outcomes, or predict the unpredictable. The terrible tragedy of September 11th was an unpredictable event. Much as portfolio insurance in the correction of 1987 it wrought upheaval in our markets. That upheaval would happen was predictable, what caused it was truly not. Who could have supposed that terrorists and airplanes would close our financial markets and paralyze our nation? It is doubtful that the specific event will ever happen again, but there will be unpredictable events and market corrections.
So as we weather the turbulence in the markets and listen to the banter of market pundits, remember that we don’t know nor can predict the outcomes. It may well look very clear and logical once it has unfolded, but using clarity and logic won’t predict the outcome. We may well be looking in the wrong places or at the wrong things.
So how will the subprime lending crisis play out? It may well go far beyond the lenders and be a very long tailed event. It could also be a non event and just the current focus of the media and market participants. The one thing we know for sure is that it will create investment opportunities for those who are prepared.
