Beware the Black Swan

I’ve been babbling for several months now on this blog (and, as my wife can attest, for several years before that) about the risk of low probability, high impact events–what Nassim Taleb refers to as Black Swans–particularly related to the housing market.

It seems that chicken may finally be coming home to roost in the housing market and the markets that rely strongly on the housing industry.

Before I crow too loud about the malaise that is occurring, I must freely admit that I did not place any money-making bets on this decline. Quite the contrary, all I did was try to stay away from such a risk.

In staying away, I missed out on the huge run-up that has occurred in mortgage lenders, mortgage insurers, bond insurers, home builders, etc. This made me look pretty stupid in the short run, but right now I’m quite happy I don’t own any companies in these industries.

Will these industries face a total collapse or a financial crisis? I have no idea. The odds are against it. But, like all Black Swans, I want to avoid such negative, low likelihood, high impact events.

I don’t have to be able to predict when they will happen or how bad it will get, I simply have to stay away from risks I cannot accurately assess or that do not provide sufficient compensation for their risk.

I will be very interested to see how bad such housing related markets get, but I still don’t think I’ll be participating there for quite some time. After all, because it seems to be a Black Swan, I don’t know how bad it will get, and so I’m staying away until I understand what’s going on.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.

Mortgage market information

For those of you interested in gaining a better understanding of the mortgage market and what is going on recently, I’d like to recommend some great resources.

First is an extremely thorough report by CreditSuisse. It covers the mortgage market in detail and makes some predictions about how things may turn out. It’s 67 pages long, but there is a 10 page summary that will give you a flavor of their findings. http://www.billcara.com/CS%20Mar%2012%202007%20Mortgage%20and%20Housing.pdf

A more narrowly focused website that takes the subprime market to task is: www.lenderimplode.com. According to this website, 44 subprime lenders have exited the market.

A friend of mine, Bill Moyer, CFA, recommended the following blogs with additional information on lenders and the housing market:
http://calculatedrisk.blogspot.com
http://bigpicture.typepad.com
www.wallstreetexaminer.com

I found calculatedrisk to be particularly informative and thorough.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.