If you took away the ten best days of the stock market’s history over the past 109 years, two-thirds of the cumulative gains produced by the Dow Jones Industrials would completely disappear. Conversely, if you avoided the ten worst days of the market’s performance over the span of its history, you would have tripled the actual return of the Dow.
Surprisingly, those market-changing events represented just .03% of the market’s history: 10 days out of 29,694. As Jason Zweig discussed in his January 24, 2009 Wall Street Journal article, “Why Market Forecasts Keep Missing the Mark,” history shows us that most of the time the market kind of bumbles along rather quietly. And then, when no one expects it, there is a giant gain or loss. Afterwards, the market settles back once again into its less dramatic track.
Zweig compares the behavior of the stock market with philosopher and trader Nassim Nicholas Taleb's Black Swan theory, which says that life will periodically be interrupted by earth-shattering events that are hugely important, rare, and unpredictable. The label comes from an old philosophical argument: you might believe that all swans are white, but no matter how many white swans you see, you can never prove it is true.
On the other hand, you only have to observe one single, unexpected black swan to disprove it. Black Swan events, by definition, are enormous and staggering, but afterwards we all think that it should have been anticipated somehow. Couldn’t we have prevented 9/11? The Titanic disaster? The great credit market meltdown of 2008? I mean, the signs were there all along! Any nincompoop should have seen it coming, right?
According to Taleb, life is filled with unpredictability even though we are always surprised when it happens. The harsh reality is that we are very bad at predicting anything accurately, despite all the after-the-fact analysis that says we should have known better. Almost everything significant and life changing that happens — in world events or in your personal life — is considered a black swan event.
Those few dramatic swings of the stock market would also be considered Black Swans. No one could have predicted when they would happen, and we can only really understand why it happened after the fact. That is the reality of the stock market.
That unusual market behavior and the Black Swan theory reminded me a lot of the trajectory of my career path over the past twenty years. It goes something like this: nothing, nothing, boring, hard work, minor breakthrough, work, tedious, nothing, setback, routine, nothing, and then, suddenly - BAM! Out of the blue, a major can of whoop-ass is delivered to my door.