The black swan in question is the allegations about Standard Charted (SBCFF) doing business with Iran and the trouble the bank could get into if true. The point of this post will not be to try to dissect the story but explore the nature of getting blindsided by this sort of story that ends up taking a stock down a lot all at once.
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There are plenty of investors who prefer to have much larger allocations to their favorite stock picks, like 8-10%. One observation I've made is that in a diversified portfolio of stocks there will be one that turns out to be the best performer over some random period of time and one that will be the worst performer over the same random period of time. Layer on top of that that no one can be correct 100% of the time and you realize that there is a good chance that the worst performer will in fact go down. If you knew ahead of time that a stock would go down and be the worst performer then you probably would not buy it.
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This is why I prefer 2-3%. When a Stan Chart-like event happens you won't get blown up and when something does fantastically well a 2-3% starting point is large enough to be meaningful to the entire portfolio.
The other aspect to this type of story is the extent to which it is yet another anecdote that scares people away from individual stocks in favor of funds (obviously if the stock fully recovers in a week it wouldn't scare too many people). The ETF landscape is continually evolving to offer new access but there is still room for individual stocks to make for a more complete portfolio. ETFs could be the core with a few stocks to serve as the explore or a portfolio could consist of a diversified set of ETFs with a few individual stocks to add a higher dividend yield.
ETFs definitely can get a portfolio most of the way there but individual stocks are still a crucial component (most of the time) too.
3 comments:
Roger, another Black Swan event I see developing is Capital Appreciation Bonds (CAB). Here is a link to an article about a CAB in the Poway Unified School District (located just N of San Diego, CA):
http://www.voiceofsandiego.org/education/article_c83343e8-ddd5-11e1-bfca-001a4bcf887a.html
I read other places today that other taxing authorities in CA have also issued such bonds. Looks like an almost guaranteed bankruptcy filing when it comes time to start making payments. Perhaps Meredith Whitney was just early with her warning as these types of outrageous instruments make their way into the municipal bond market. Thoughts?
not a black swan as this is foreseeable. other states (michigan i believe) banned use of them.
Non-systemic risk is a well understood (as a preference for smaller portfolio positions and similar stratagems illustrates) but exactly which issue will fail, particularly a blow up like SBCFF, that is not predictable.
Like the take Ritholtz had at http://tinyurl.com/caqrel3 -- if NYS is as serious and uninterested in cooperating with the Feds as their letter seems to suggest, somebody in leadership at Standard is going to be prosecuted regardless of what happens to the company. Actually it might salvage the company in investors' eyes if they did so.
Come to think of it that would probably be true of a bunch of financial companies out there.
NB: Never had any interest in buying CAB issues myself but, maybe more to the point, couldn't understand why anyone else would have any interest in buying them either; i.e., I can see why a municipality might want to take a chance on issuing these when they can't raise taxes but who are they selling them to?
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