Finance Your Budget ‘Black swan’: strange finance terms explained

‘Black swan’: strange finance terms explained

These ancient phrases teach important money lessons. Photo: Getty
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Liberal MP David Coleman has thrust “black swan”, a phrase that would confuse many Australians, back into the headlines.

During the high-profile bank hearings, broadcast live across the country, the economics committee chairman said he refused to accept that financial planner misconduct at the NAB bank was a “black swan event”.

Liberal MP David Coleman said NAB financial planner misconduct was no "black swan event".
Mr Coleman said NAB financial planner misconduct was no “black swan event”.

“You said you had 1700 financial planners, of which 43 have been terminated, so what is that? It is about 2.5 per cent. That is one in 40,” Mr Coleman told NAB boss Andrew Thorburn.

“I would not say that was a black swan event. You have one in 40 people being terminated because of these very serious instances.”

What Mr Coleman meant was that the misconduct was surely not out of the ordinary.

“Black swan” is one of many phrases in the world of finance, dating back hundreds or even thousands of years, that teach important money lessons.

‘Black swans exist’

“Black swan” is a phrase popularised by finance professor and trader Nassim Nicholas Taleb.

Just because you've never seen a black swan (or a property market bust), doesn't mean it can't happen. Photo: Getty
Just because you’ve never seen a black swan (or a property market bust), doesn’t mean it can’t happen. Photo: Getty

He used it in his book, The Black Swan: The Impact of the Highly Improbable, to argue that seemingly rare and difficult-to-predict events (such as Brexit) are more common than we think, and must be prepared for.

The phrase dates to the British discovery of Australia. Before then, it was thought that all swans were white. Our native black swans proved them wrong.

The money lesson is that we should always prepare for the worst. Never seen a stock market collapse or a property market bust in your lifetime? Doesn’t mean it can’t happen.

‘Do you want to eat well or sleep well?’

Waddesdon Manor is a country house in the village of Waddesdon, Buckinghamshire, England. The house was built in the Neo-Renaissance style of a French château for Baron Ferdinand de Rothschild. Today it is owned by the National Trust. Photo: Getty
Baron Ferdinand de Rothschild, who built Waddesdon Manor in England in the 9th century, might have uttered the famous words. Photo: Getty

It is fabled that Baron Rothschild, a member of one of the most famous banking families in the world, was asked for financial advice some time in the 1800s.

He was asked to choose between two investments, one with a high rate of interest and another with a much lower rate.

Legend has it that the Baron replied: “If you want to dine well, go in for the first. If you want to sleep well, invest in the second.”

The important lesson is that risk and return are aways correlated. If someone promises you sky-high returns, do plenty of research or you could be in for many sleepless nights.

‘Where are the customers’ yachts?’

In 1940, Fred Schewd, Jr wrote a book about investing called Where Are the Customers’ Yachts?

Is the company working in its customers' best interests? Where are their yachts? Photo: Getty
Is the company working in its customers’ best interests? Where are their yachts? Photo: Getty

It begins with the following lines:

“Once in the dear dead days beyond recall, an out-of-town visitor was being shown the wonders of the New York financial district. When the party arrived at the Battery, one of his guides indicated some handsome ships riding at anchor.

“He said, ‘Look, those are the bankers’ and brokers’ yachts.’

“‘Where are the customers’ yachts?’ asked the naive visitor.”

There’s a couple of lessons here. The cynical one is that the bankers always win – the system is rigged.

A more helpful takeaway is to judge any financial advice you receive by the history of the organisation or expert offering it. Do they have a history of happy customers, low fees and solid returns? Or are they promising you the world, while leaving a string of angry victims in their wake?

‘Tie me to the mast’

In the epic poem The Odyssey, the hero Odysseus is navigating past some small islands on his way home after the fall of Troy.

Odysseus Sirens. Photo: Getty
Odysseus teaches the importance commitment devices. Photo: Getty

He is warned that Sirens swim in the area. Their magical song impels sailors to crash themselves upon the rocks, where they are devoured.

Knowing he will be unable to resist their alluring song, Odysseus commands his sailors: “You are to tie me hand and foot and stand me upright in the mast housing, and fasten the rope ends round the mast itself, and if I beg you to free me, bind me yet more tightly.”

By doing this, the hero is able to avoid temptation.

The lesson is that, when it comes to money, we find it hard to stay on the straight and narrow (get home to Ithaca) without some sort of commitment device. We spend frivolously, fail to put aside enough for rainy days and retirement, pay too much attention to the daily fluctuations of the stock market, etc.

The modern equivalent of Odysseus’ ropes might be to set up an automatic weekly transfer into your savings account, ask your boss to salary sacrifice from your pay into your super fund, or to disable the smartphone apps that give you constant updates on short-term stock market fluctuations.

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