Thursday, 29 December 2011

White Swans

Business Mirror

A “Black Swan” event is something that happens which is completely unexpected and with far-reaching consequences and effects. It is almost impossible to prepare for something like this.
An example might be the 9/11 terrorist attack, unknown beforehand except to the perpetrators. Another example would be the assassination of Ninoy Aquino. No one expected it. No one was prepared for it.

However, Black Swan events can be progressive. The creator of the concept, Nassim Nicholas Taleb, uses the Internet as a perfect Black Swan event.

The Internet was first created as way for university computers to share information in the early 1970s. Who could have imagined or planned that 30 years later, virtually any person on the earth with a cell phone would be connected through the Internet.

If there are unexpected events that cannot be prepared for, there then should be what I will call “White Swan” events that we should be able to see coming and make preparations for.

Even certain unexpected events are thought through and have contingency plans. Every major news organization in the world has an extensive file of obituaries prepared when a celebrity or well-known person dies. Governments have a plan of succession in the event a leader dies, resigns, or otherwise cannot perform his/her duties.

Natural disasters, no matter how severe, are expected to occur. The fact that the contingency plan may not be complete or effective does not change the fact that they are probable.

In truth, it is a bit silly to think and worry about the Black Swans that could happen because the moment we figure out that they might occur, they really are no longer Black Swans. We can prepare and plan for them.

But for the average person, it is the White Swan events that create the most problems. We know they can and will happen. But when they do happen, we do not have a plan. Because we do not maximize the opportunities of events we can anticipate.

The White Swan events that we will encounter in the next 12 months are right in front of us.

The peso/dollar rate is going to fluctuate. This is what we absolutely do know. That seems obvious yet when the peso moves in one direction for a couple of weeks, it becomes a big story. Currencies were very volatile these last few months. However, the Philippine peso was expected to be stronger toward the end of the year when in fact, the peso/dollar rate is almost unchanged from one year ago.

So where is the peso going to be a year from now? I do not have a clue.

But how do you prepare? Most individuals try to take advantage of peso movement the way they drive, switching lanes every time the car next to them moves ahead. It is simply impractical. If your business needs dollars then either purchase forward contracts or buy the physical currency at whatever price it is now and then factor that price into your financial model. The buy/sell spread on the peso at your local bank is so high that it makes no sense to play the movement.

Trying to anticipate currency-price movements over a longer term is only for professional traders.

The stock market is going to go up and then it is going to go down. But millions of Filipinos who could and should be investing do not. They are afraid of the downs. A wise man once said that if you are afraid of losing, you are more afraid of winning. Market fluctuations are a White Swan that can easily and effectively be taken advantage of.

Your house can be instantly destroyed in an earthquake. So why don’t you move to London; no earthquakes there. Because you manage earthquake risk—insurance, sound building practices and proper preparedness for an earthquake are a white swan.

We know that the Philippine economy is going to be difficult this coming year. So what have you done with your personal and business financial model to prepare?

When Ondoy came, only three houses in my little village did not flood badly. I was fortunate. But when the storm cleared, I bought some sandbags. When the next major flooding hits, I am prepared.

Do you have a worst-case scenario plan if GDP growth hits low-end 2012 expectations of 3 percent? Your business model should include a 10-percent revenue decrease. Can you survive that?

Are your personal finances ready for a likely 5-percent inflation and lower income in 2012?

It is not Mayon Volcano blowing its top that’s going to get you. It is the things you know are coming that you have not thought out and planned how to handle.

E-mail to and Twitter @mangunonmarkets. PSE stock-market information and technical analysis tools provided by Inc.

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