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What is a Black Swan?

Veteran international investor John Corey offers his latest thoughts

The Financial Times lexicon defines a Black Swan as follows: “An event or occurrence that deviates beyond what is normally expected of a situation and that would be extremely difficult to pre-dict.” Nassim Nicholas Taleb’s book, The Black Swan brought
the term to the consciousness of the financial community.

The historical context is this. Europeans did not think a swan could be black because they had not seen a black one before. If you have never seen something, you have a harder time believing it can exist or can happen. When European sailing ships reached Australia the site of black swans changed what was possible. A change of perception and expectations rather than a biological change. Black swans had been around for a long time.

A property investing example is the conversation around interest rates. I started investing when rates north of 10% were quite normal. My first loan was 10.75% and at the time that was a good rate. I was overjoyed by the deal and the cashflow. Today, people who have been investing since 2008 think anything close to a 5% loan rate is unworkable or is a rip-off. Perception and how we frame something determining what we think is possible.

At recent events where property investing was the focus for the group, questions like the following came up:

  • What impact will Brexit have on house prices?
  • Why are the Tories looking to squeeze out the small landlords?
  • What will happen to interest rates after we leave the EU?
  • What is going on with technology that will change how we live?
  • Are house prices going to crash?
  • Will AirBnB get banned or restricted in London and in the wider UK?
  • Should investors focus on the North for cashflow given London and the SE is going to crash?
  • How did Dublin house prices bounce back so strongly and why do they have a housing shortage? Is the legislative change for short-lets in Ireland going to sink AirBnB in Ireland?

I am sure you have heard or are asking yourself and friends similar questions. Being aware of change and pondering the future is good for an investor, but we need to focus on fundamentals.

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