Catastrophising Gets us Nowhere

Editor's Views: How rare are Black Swans and how contrarian are contrarians - is it time to stop labelling everything in the investment world?

Holly Black 29 May, 2020 | 11:55AM
Facebook Twitter LinkedIn


The words “unprecedented” and “Black Swan” are thrown around a lot at the moment, and certainly we’re living through unusual times. But in investment terms, is the current environment really so uncommon?

As Dr Paul Kaplan’s deep dive shows, so-called Black Swan events seem to happen every seven years or so – hardly as rare as you might think. His look back over 150 years of stock market performance is a lesson not just in the merits of keeping your money invested even through the bad times, but in how frequently these bad times occur.

Part of the problem is investor short-termism. Humans have a tendency to assume the status quo – whatever it is – will continue, and any deviation from that comes as a major shock. That’s plain enough to see in how difficult the adjustment to lockdown and social distancing measures has been for so many people.

We also like to catastrophise, believing the absolute worst is happening and we’re the only ones to have experienced it. A chart of the stock market make it clear this is rarely the case.
And the 10-year bull run hasn't helped either. Investors have become complacent and come to see the upward march of their portfolios as a given, as well as a testament to their own skill (which may or may not exist).

With all that in mind, I’d argue two things. One: this probably isn’t the worst stock market episode that has ever occurred, and nor will it be the worst ever to happen. And two: a bit of volatility might actually be a good thing. For many people, it will force them to seriously reconsider their asset allocation by highlighting the crucial role that some less growth-oriented and less exciting assets have to play in a portfolio; it demonstrates the need to rebalance and do our due diligence on all investments; and crucially, it shows you can never predict what’s going to happen next on the stock market – so it’s best not to try.

Let's Ditch the Labels

What does it really mean to be a contrarian investor? We all like to think of ourselves as being independent and non-conformist to some extent, but if you’ve ever caught yourself buying a stock because a friend has had success with it, or picking a fund based on its past performance, then you’re probably not as contrarian as you’d like to think.

Contrarians look for the unloved, the out-of-favour, and the companies with potential no-one else seems yet to have appreciated. It’s an interesting investment style and one that makes a lot of sense. But it’s a difficult one too, and in an environment where quality and growth are the words on every investor’s lips, it’s frequently not been a successful one.

I speak to a lot of fund managers and quite a lot like to describe themselves as contrarian. Yet when you delve into their portfolios you often find there’s not much out of the ordinary to be found. So, what does it mean to be a contrarian in today’s context? It’s not just bullheadedly avoiding the top-performing stocks to make a point. 

Orbis’s Ben Preston says a successful contrarian will look back at the companies they bought five or ten years ago and be happy with the price they paid. But isn’t that what any investor hopes for? I sometimes wonder if these labels are helpful - whether you're contrarian, momentum or picking stock names out of a hat, we all share the same end goal: making our money grow. 

Money Matters

Salary cuts, furloughing and job losses are the reality for tens of thousands of people up and down the country at the moment, and saving money is likely a priority. While cutting back on little luxuries and tightening up on the weekly shop are sensible moves, they’re not the only ones and we’ve compiled a list of five tips that could help in getting your finances straight during these difficult times. The list is not exhaustive, of course, but it might include some things you haven’t yet considered.

For my own part, currently working from home, I’ve been using the time I would usually spend commuting to tidy up some of the household bills. I’ve switched the energy tariff to save more than £30 a month, upgraded the internet to fibre as the existing service wasn’t up to scratch for all those conference calls, and cancelled a couple of unnecessary subscriptions. I also like to think I’m saving money by getting my husband to do DIY jobs around the house - although, I'm not sure he's entirely on board with this part of the plan. 

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

Facebook Twitter LinkedIn

About Author

Holly Black  is Senior Editor,


© Copyright 2024 Morningstar, Inc. All rights reserved.

Terms of Use        Privacy Policy        Modern Slavery Statement        Cookie Settings        Disclosures