The Black Swan Story

To us, the black swan goes to the heart of our belief that no matter how sophisticated traders perceive themselves to be, no matter how elegantly traders believe they have “modeled the market,” no matter how strong  their  past performance has been, there is an event lingering out there that cannot be predicted—a black swan event.

It’s a market move that invalidates beliefs among the consensus.

This idea of a “Black Swan event” flows from the renowned German philosopher Karl Popper. In his famous essay entitled, The Problem of Induction, Popper said:

“A scientific idea can never be proven true, because no matter how many observations seem to agree with it, it may still be wrong.”

He used the simple example of swans to illustrate his point. For many years people believed all swans were white. Millions of observations of white swans seemingly “proved” the theory that, in fact, all swans were white. Yet, it was the discovery of a single black swan, living in Australia, which invalidated a theory based on millions of prior observations. 

As speculators, we find Popper’s logic extremely poignant. It reminds us: There is no Holy Grail. It’s one of our core beliefs. And it naturally leads us to two primary conclusions about the market.

  • Neither price nor the degree of risk in the market can be perfectly forecasted.
  • Trading is ultimately a probability bet.

You don't need to know, or believe you can forecast, in order to make money in markets. But we believe you must consistently apply a systematic approach (grounded in human nature) in order to be successful in markets over time.