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Tail Feathers

When it comes to risk, most investors protect against what they think might happen. But the real risks that impact investor portfolios are literally unfathomable, and so weighing probabilities on the various outcomes of upcoming events you already know about isn't enough.

You don't know everything that can happen. Professional investors don't know. People blabbing on TV don't know. Your advisor doesn't know. No one knows.

A quick story.

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On March 24, 2001 — Randy Johnson, a Hall of Fame Major League Baseball pitcher, showed us how real investment risk manifests (even though he didn't mean to do so).

Randy didn't calculate any ratios, nor use any spreadsheets. He didn't pick which fund manager was slightly better than the other fund manager, nor bark about the grim prospects of one sector while raving about the unlimited growth potential of another. No 200-day moving averages. No pie charts.

He just pitched the baseball. There are only two outcomes for a baseball pitch — strike or ball. That's it. No one thinks about anything else.

And as he wound up for this particular pitch, just doing his job — it happened that a dove was flying by (also just doing its job).

Since Major League Baseball began 140 years ago, there have been over 235,000 professional games. That's 2,000,000+ innings, and a lot of opportunities for weird shit to happen.

But could you ever imagine?

And you might say: Wow. I can't believe that happened.

But on a long enough timeline, it will (and did) happen. Pitchers and doves, just doing their jobs within the vicinity of each other. Sure, it takes some crazy trajectories and speeds on behalf of both the ball and the bird, and exactly at the same time, but on a long enough timeline, crazy is bound to happen.

On an infinite timeline? Crazy has to happen.

For what it's worth, Major League Baseball also doesn't believe it happened, at least statistically speaking. Because they only call balls and strikes, and there was no rule for what happens if the ball hits a bird, the pitch was scratched from the record. Essentially called a redo, and does not exist in the game stats...neither a strike nor a ball.

And why would baseball have a rule for balls hitting birds midair? Who could have imagined?

If you want to direct your energy toward a great investment experience, focus less on new mutual funds and ETFs, valuation ratios, and economic forecasts. Listen less to your broker, your neighbor, and your friends.

Focus on the fact that back in 2001, the ball hit a bird.

And someday, it will happen again. You can imagine that the possibilities that might occur between the moments the ball leaves the pitcher's hand, and hits the catcher's mitt, are relatively limited compared to what crazy events could happen anywhere, anytime, anywhere in the world — during your investment horizon.

It will happen. We just don't know where, when, or what.

Future events that investors can't know about have always existed, but they can't explicitly be incorporated into asset prices. Accepting this uncertainty is why stocks have a positive expected return.

Who would take the risk of the unknown if there wasn't an expected reward?

In the remaining weeks of 2022, we will hear new information about the economy. Will inflation slowly come down? Will employment levels stay stable? Will holiday spending be higher or lower than expected? How about escalation in Ukraine being heightened or lessened? Will former President Trump be the Republican candidate in 2024?

Sure, all these things matter a little bit. But not that much. In recent decades, what's really moved portfolios have been mostly unfathomable: planes crashing into buildings (2001), mortgage derivative contracts imploding (2008), negative interest rates (2012), and a multi-year coronavirus pandemic (2020).

You don't see these things written about in strategy brochures. There's no easy sale to be made when you tell people, "I don't know shit about the future. Can I manage yours?"

But more people should say it. That's how it actually works, and there's immense value to planning for the unfathomable, because the stuff we've never dreamed of is what drives the outsized price changes that really impact your portfolio, and test your behavioral resolve — not the outcomes of events we already know a bit about.

The next time someone pumps you an investment opportunity, consider how narrow future events need to be for it to work properly. Is it positioning itself based on the outcomes of things we already know about, and just picking a side? I'm not arguing that can't work, I'm just arguing that it's small-ball investing.

The big leagues? What will really impact your success or failure as an investor?

No one knows where, when, or what yet. These events are unfathomable.

Because in 140 years of baseball, the ball does hit the bird.

And in a game where balls and strikes are the only two options, it upends the rule system and is neither. Seemingly impossible. Who could have imagined?

When asked about the feathered incident, Randy Johnson responded simply.

"It was a blur," he said.

Of course it was. What did he expect?



My blog posts are informational only and should not be construed as personalized investment advice. There is no guarantee that the views and opinions expressed in my posts will come to pass. They are not intended to supply tax or legal advice and there is no solicitation to buy or sell securities or engage in a particular investment strategy.

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