Black Swans: House Fires, Pandemics, and Financial Crises

Black Swans: House Fires, Pandemics, and Financial Crises

 

Gene McManus, CPA, CFP
Gene McManus, CPA, CFP

“Fire! Get Out!” It was a dream. It must be a dream. My oldest daughter was calling to me. I had eaten a large meal that evening with at least one glass of wine and was sleeping soundly. However, this dream did not fade, but instead grew clearer and more persistent. Again, I heard her say ”Fire! Get out!” I soon realized that it was not a dream and, in fact, my daughter was urging us, “Fire, get out!” Opening my eyes, I saw smoke gathering in the ceiling of our second story bedroom and bounded for the door.

Fire at McManus Home
Fire Damage at McManus Home

 

Unbeknownst to me, I was about to experience a Black Swan event. This term comes from a common expression in Europe originating in the sixteenth century to refer to a situation that could not exist – as black swans had never before been seen. Until… Dutch explores discovered a black swan in western Australia. For those not familiar,  a “Black Swan” event is one that is unpredictable, beyond what is normally expected of a situation, and has potentially severe consequences. Black Swan events are characterized by their extreme rarity, severe impact, and the widespread insistence they were obvious in hindsight.

 

As my neighbors offered help and inquired as to the cause of the blaze, I already had a theory. I have always been a believer in Occam’s razor which states the simplest explanation is usually correct. You see, I had emptied the fireplace cleanout about five hours earlier. As is my habit, I had put the ashes in a plastic kitchen trash bag so that any smoldering embers would immediately be evident since they would melt the side of the bag. I also ran my hand over the ashes to make certain. We had not had a fire in two days. Despite a great deal of speculation by many over the next few days, the fire investigator later confirmed what many know – I am an idiot.

 

I am a safe idiot. However, it was a fire in the trash cans that caused the blaze.

 

I have been emptying that cleanout for twenty-five years the same way. Trash cans have a secure lid that should allow very little oxygen for a fire. We had driven by the trash can two hours earlier and noticed nothing.

PARALLELS TO INVESTING

Black Swan events have referenced many surprise financial events. Some that immediately come to mind are: Y2K, the Dotcom Bubble of 2001, the 2008 Financial Crisis, and our current COVID pandemic.

 

Can we prevent Black Swan events? No, we can prepare for them. We prepare for financial black swan events by diversification, regular communication, using common sense, and research. This allows our clients to “ride out’ the financial storms that usually accompany black swan events.

 

Personally, we were prepared with wonderful neighbors and a good insurance policy.

 

Our clients are prepared with a solid investment strategy that takes into consideration their risk tolerance,  time-horizon, and a focus on both asset allocation and customizing portfolios using model portfolio groups.

 

Do you have questions about the current financial market? Our advisors would be happy to speak with you about your specific situation. Call (706) 364-4281 or email [email protected]

 

Gene McManus, CPA, CFP

Financial Advisor, Managing Partner

 

You can hear Gene discuss this story and its implications in the latest recording of The Briefing below.