extreme risk

Morning.

Had a proper row with a financial advisor yesterday.

He's telling his clients that market crashes are "unpredictable" and "nobody could have seen 2008 coming."

I nearly choked on my coffee.

Here's what this muppet doesn't understand:

Fat tails aren't bugs in the system - they're features69.

And if you understand them, you can actually profit from everyone else's ignorance.

Let me break this down:

In a normal bell curve world, extreme events (crashes, booms) happen 0.1% of the time.

In reality? They happen about 5-10% of the time45.

That's a 50x difference.

Imagine if your sat nav was 50x wrong about journey times. You'd throw it in the bin.

But we base our entire investment strategy on this broken model.

Recent research analysing the Korean stock market found that ‘fat tails in return distributions are shown to be much fatter in recent periods than in past periods.’

Why? Well more algos who don’t have a set of bollocks on them like humans do, who would be willing to step in and make a market when price collapses (see 2010 Flash Crash).

Translation: It's getting worse, not better.

The cryptocurrency markets? Even more mental.

Studies show that crypto returns have ‘one polynomial tail and one exponential tail’ - which is academic speak for ‘absolutely bonkers in both directions.’

But here's the thing nobody tells you:

Fat tails cut both ways.

Yes, you get more crashes.

But you also get more explosive upward moves.

Those ‘once in a lifetime’ bull runs? They happen every few years if you know where to look.

The S&P 500's distribution shows multiple peaks - not the single peak of a normal distribution.

There's a peak around 0% (bear markets), a peak around 30% (bull markets), and different patterns depending on whether you're looking at 1-year, 3-year, or 10-year returns.

This is why diversification isn't enough.

This is why ‘buy and hold’ isn't a strategy (at Fink Academy we suggest a long term view with active management of the trade).

This is why understanding statistical distributions isn't just academic wank - it's survival.

Tomorrow, I'm going to show you exactly how to position yourself to profit from fat tails instead of getting crushed by them.

Because while everyone else is panicking about the next crash, you'll be the one buying when others are selling.

P.S. - That financial advisor? He's still recommending 60/40 portfolios. I genuinely worry for his clients.

Click here to read the penultimate part of the series.