Last week, investors throughout much of the world either\nwent to sleep with or woke up to the headlines about the drone strike on an\nIranian commander. This was clearly an\nimportant story from a geopolitical perspective, but events of this nature\nrequire a clear focus from traders and investors when assessing their impact\nupon one\u2019s portfolio.<\/p>\n\n\n\n
Significant events that occur seemingly out of the blue are\noften referred to as stochastic events. \nIt is useful to think of them as \u201cunknown unknowns.\u201d This differentiates them from the multitude\nof \u201cknown unknowns\u201d that drive the markets daily. The latter category includes items like\nearnings, sales, dividends, interest rates and the like. All market participants know that these items\ninfluence prices of individual stocks and the broad market, and many of them\nare well-telegraphed. Companies\ntypically announce their earnings release dates well in advance and the Federal\nReserve publishes a calendar of its significant events. In the interim, traders and analysts digest a\nwide range of news items to help them prepare for these developments and price\nfinancial instruments accordingly.<\/p>\n\n\n\n
Stochastic events, or \u201cunknown unknowns\u201d, seem impossible to\nplan for \u2013 but that is only partially true. \nThe most recent event was a closely guarded secret, but investors should\nhave expected that there was a reasonable possibility for some sort of crisis\nthat could impact oil producing nations in the Middle East. One could not have hedged the risks\nsurrounding this specific incident, but smart risk managers would have game\nplans ready for events of this nature. <\/p>\n\n\n\n
Traders and investors should continually consider how a wide\nrange of low probability, high impact outcomes might affect their\npositions. Advance planning would help\none to avoid catastrophic portfolio risk and offer a path for seeking\nopportunities during a chaotic period. It\nis extraordinarily difficult and expensive to hedge amidst a nervous market,\nand it is very difficult to strategize more quickly than those who have done so\nbeforehand.<\/p>\n\n\n\n
Last week\u2019s incident fell under the category of potential oil shock, since it directly affected relations among leading oil producers.\u00a0 The price of crude oil jumped accordingly, along with classic safe havens like US Treasuries, gold and the yen. That they moved so quickly it’s a testament to the preparation that the fastest traders have done in order to respond to news of this type and magnitude.\u00a0 Other risk assets fell, as markets tend to utilize a broad \u201crisk on\/risk off\u201d paradigm.<\/p>\n\n\n\n
As with many moves of this type there was an early\noverreaction, as we saw oil fall from its highs and equity indices rally from\ntheir lows. This is a testament to\navoiding panicky situations at all costs. \nOn Friday morning someone was selling S&P Index futures down nearly\n50 points, and he had to regret that sale as those futures halved their losses\nshortly thereafter. It is imperative not\nto succumb to panic, and even more imperative not to put yourself in situations\nthat require you to act during those moments.<\/p>\n\n\n\n
There are many more nuances to this topic, and I expect to\nbe discussing them in writing and on video in the coming days. But the most important takeaways from\nunexpected geopolitical events are to be prepared in advance for low\nprobability\/high outcome events and not to panic when they do occur.<\/p>\n","protected":false},"excerpt":{"rendered":"
Stochastic events, or \u201cunknown unknowns\u201d, seem impossible to plan for \u2013 but that is only partially true. The most recent event was a closely guarded secret, but investors should have expected that there was a reasonable possibility for some sort of crisis that could impact oil producing nations in the Middle East. <\/p>\n","protected":false},"author":4,"featured_media":23293,"comment_status":"closed","ping_status":"open","sticky":true,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[4,5,14700,18,6,8,9,26,3],"tags":[2405,267,1804,40,618,52],"contributors-categories":[13576],"class_list":{"0":"post-30370","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-asia","8":"category-europe-middle-east-africa","9":"category-ibkr-market-insights","10":"category-macro","11":"category-north-america","12":"category-region","13":"category-securities","14":"category-text-articles","15":"category-traders-insight","16":"tag-dividends","17":"tag-earnings","18":"tag-middle-east","19":"tag-oil","20":"tag-risk","21":"tag-us","22":"contributors-categories-interactive-brokers"},"pp_statuses_selecting_workflow":false,"pp_workflow_action":"current","pp_status_selection":"publish","acf":[],"yoast_head":"\n