Betting On Black Swans

I recently finished reading Michael Lewis's book about the stock market crash and the start of the Great Recession, The Big Short. I love ML's books - I read Liar's Poker about a dozen years ago, before I knew anything about Wall Street, markets, or investing. I think I picked it up off a $1 book table, and was mesmerized. Unlike many others, I did not read it as a 'how-to' manual.

The Big Short though, that hit a nerve. No, no, I wasn't betting against the subprime market, although I did wonder how long the general population thought that maxing out their credit cards and cashing out home equity to shop at Pottery Barn would last. I really wondered how certain individuals managed to afford the homes they bought, and I was fairly certain that most of Wall Street was reasonably corrupt. That said, until I read The Big Short, I did not have a clue how corrupt and stupid the people that created this mess were. To say the book is enlightening may be one of the greatest understatements of all time.

But it got me thinking about something I've been mulling for a while, which is hedging the market against peak oil. Or starting a hedge fund. But since I don't know anything about hedge funds except that they sound like 'hedgehog' (I'm not sure that some of the people running them know more, to be honest, but we'll leave that alone for now), for now, we'll talk about my personal money.

I am a big believer in investing in what you know. But I'm not a believer in trying to time markets, or predict the behavior of people. Both are pretty fallible, and most of us bank on the idea that the future will look somewhat like the present. The idea that it might not is often discarded out of hand, or referred to as a 'Black Swan Event'. I've long taken the tack that Black Swan events are not necessarily the outliers they are assumed to be, but often predictable and natural outcomes of actions and reactions. It goes back to kindergarten science: What goes up must come down.

This often paints me as a pessimist. I'm not really, I just tend to think using the idea that life as it is will be fundamentally similar to how it has been as a predictor of the future is really sort of short-sighted. Assuming that things will change, sometimes radically and unpleasantly, sometimes for the better, but will always have an outcome of change, seems like a better bet.

So I've been thinking about taking a few market positions based on my theory of the outcome of Peak Oil impact on the next 25 years. If I'm wrong, I could lose money. If I'm right, I could become one of the few that makes money out of the crisis. My only reluctance is a moral one - is it right to bet on a catastrophic outcome? I think yes, and no. Yes in the sense that planning for the future, no matter what you think it will look like, is a good thing. No in the sense that there is some moral hazard to betting on things falling apart - especially because there is always a loser in these bets. That said, they might be losers anyway.

Most of us build our lives around the predication that catastrophe will not affect us. This is a good thing - trying to build up barriers against all potential risk and/or hiding under the covers is rarely a good approach to life. But the assessment of feasible risk is a smart thing. The trouble is the realization that there might be a finer line than most of us prefer between reasonable risk assessment and paranoia. I'm going to go for the idea that I'm using the former, while taking into account the idea that crazy people rarely know that they are crazy. Hedging on one's own point of view is often the ultimate risk.

So where will I put my money? Probably some into oil futures, some into the local economy, and some into businesses that will allow information flow in an era of decreased mobility. As I firm up my plans I'll blog more about them - my husband and I are still dealing with the immediacy of his job loss, so making bets on the future is something I have to wait on right now.

If I'm wrong, I'm wrong. It might hurt to lose money, but that's all. And if I'm right, it won't be a happy collection of profit. But it will be a predictable one.