The “black swan” flies again

For the average investor, it’s hard to beat “buy and hold” over the long term, even though there will be times — such as now — that other strategies will look attractive. One such strategy is the “black swan” strategy popularized by Nassim Nicholas Taleb. The strategy is named in honor of the once-received wisdom that black swans were impossible — until black swans were discovered in Australia.

Taleb’s strategy essentially involves betting that rare events (financial “black swans”) will eventually happen, and being positioned to take advantage of those rare events. This year, that strategy has worked out well, producing returns of more than 50 percent.

So, should we all jump on the black swan bandwagon? Here’s why we shouldn’t:

Individual investors without inside information can’t predict what exotic strategy will work. The question for us, as small fish in the investment markets, is not whether a “black swan” strategy would work.

The question is — without being able to see into the future — how do we invest our money? Or, to put it another way: Before September, if you were picking an exotic investment strategy, would you have picked the “black swan” or gold or even Bear Stearns stock? Very few of us would have picked a “black swan” strategy and most of us would have picked strategies that lost money, big time.

The guiding rule is: Don’t compare the actual results of “buy and hold” with the theoretical results of having made just the right call. Instead, compare “buy and hold” with the strategies you likely would have chosen. Over long holding periods, “buy and hold” is hard to beat.