The catalyst for this post is a similarly titled post from Cam Hui at the Humble Student blog. You may know the term Extremistan from Taleb's writings which Cam defines as "a state where one's wealth can change massively in a very short time" or as he puts it elsewhere in the post as 100 year floods happening every few years. For Taleb's part he describes Extremistan as "a world I describe as one in which random variables are dominated by extremes, with Black Swans playing a large role in them."
Hyman Minsky is celebrated posthumously for observing that very extreme events occur as a result of long periods relative tranquility which creates complacency. The complacency then gets shattered by something like Bear Stearns or Lehman Brothers blowing up.
Are we now in Extremistan? When will complacency return so we can all go back to making money again? Candidly I do not frame it this way. I think Minsky's idea holds plenty of water and I don't think disagree with Taleb, I just don't think in terms of tails in the manner that Taleb (and Hui) writes about them.
Where extreme events are concerned I think about avoidance more than anything else. For my money S&P 500 sector weights give ample warning of trouble (but not magnitude). This worked with energy almost 30 years ago, tech ten years ago and financials three years ago. For people who have been reading this site for a while, are you going to overweight the next sector that comprises 20%, or more, of the S&P 500? In the last decade I think choosing the correct sector to avoid has been the most important decision possible regarding domestic stocks.
WRT to foreign stocks figuring out what countries to avoid (Japan and big Western Europe) may not have been as important as picking Brazil or a couple of others but avoiding those countries did make things much easier.
Obviously some folks would argue that just as it is impossible to pick stocks it is probably impossible to correctly avoid stocks as well. One such person could be Jack Bogle. He was profiled in the LA Times. He is widely known as a proponent of indexing but as the LA Times article notes (I have mentioned this once or twice as well) he is pretty good at making macro market calls. I find it fascinating that one of the foremost indexers is a pretty good timer.
Bogle isolates a key point about the pitfalls of emotion. Paraphrasing him from the LA Times article people look at their statements, see something they don't like and end up selling low only to be followed later by buying high. I agree that emotions are one of the biggest threats to investment success, maybe the biggest.
Where I disagree (actually there are a couple of things I view differently than Bogle does) is that indexing worked over the last decade. I don't think it did. The Vanguard Total Stock Market Fund (VTSMX) was up 4.1% last decade including dividends and the S&P 500 Total Return Index was down 4.5% (both numbers per Morningstar). Recently I cited an article written by a fund manager who believes people realistically only have 20 years to accumulate for retirement. While I think people have more than 20 years it makes the point that no growth for ten years can be a big problem and while a repeat of that this decade is a low probability I would not want to bet/rely on indexing working in this decade.
To the extent Extremistan exists, to the extent we will have future Minsky Moments and to the extent our emotions are our worst enemy the focus here will continue to be avoiding certain sectors, countries and themes. The behavioral finance nugget about the emotion of losses dwarfing the emotion of gains rings very true and I think reducing the chances of huge losses is the most effective way to navigate through. New readers can search for my name with the term 200 DMA for more details.
Mercifully Fox has not renewed the show 24 so when the current season ends in May that will be it. I used to love the show and have stuck with it last season and this despite how bad it has been all the while hoping they would pull plug.