It was hard to miss the news today that Citigroup has busted the buck intraday. It was not too long ago that the banks were considered dull, uneventful and steady with Citigroup being the flagship. But that era is ending badly. Unable to help myself, I looked at the price chart and copied it below.
Figure 1. Citigroup Price Chart for the last 20 Years.
Source: Yahoo Finance
The initial March 1989 price was $1.85 and the shares soared to a of $55+ in May of 2007 and subsequently have crashed in dramatic fashion. While the shares rallied to a close above $1 today, the market cap is a modest $5.56B. Citigroup equity is essentially vaporized, down from a staggering ~$275B market cap on May 24, 2007.
The shape of the chart made me think of an illustration in a book I have been reading recently titled, “The Black Swan: The Impact of the Highly Improbable” by Nassim Taleb. Great book with lots of provocative ideas to think about. I highly recommend it.
One of the early concepts Nassim introduces is Thanksgiving from the perspective of a turkey. For the preceding 1,000 days before Thanksgiving, the turkey is fed generous portions of whatever it is that turkeys eat. It is very likely that the prospective feast is thinking that there is every indication that the current trend of being well fed and cared for will continue. In fact, it may be that the unaware turkey is thinking that currently visibility on getting fed looks better than ever and anecdotal evidence indicates that day 1,001 will continue at the same robust growth that seems… well automatic. Life is good! Lotsa food, no hunters and the farmer cares for the turkey lovingly and looks at him with a twinkle in his eye. Unfortunately, we know how this story ends- on day 1,001, the turkey is slaughtered and eaten for the Thanksgiving feast. See chart below.
Figure 2. Thanksgiving from the Turkey’s Perspective
Source: The Black Swan by Nassim Taleb
According to Taleb, the turkey’s problem lay in its inability to discern the true nature of his circumstances. In other words, the turkey was ignorant of the risk his position contained. The turkey simply had no way of knowing the profound danger it lived under because its circumstances gave no indication about it. And while life seemed so clear and understandable from the experiential perspective, it was entirely misleading with respect to his real risk- until it was too late.
While I have reproduced the graph imperfectly and retold the tale clumsily, I cannot help but see the parallels between the chart of the turkey and the stock price of Citigroup. The similarities are striking. Steady increases with no indication that the bottom would fall out. Then it did.
Now before you incorrectly infer that I am comparing holders of Citigroup to turkeys, I will state that based on my experience with institutional investors, they are mostly highly intelligent, capable and very thorough investors. In fact, the complete opposite of turkeys.
And therein lies the sobering truth in front of us. If the best and most accomplished among us have trouble understanding the true nature of risk inherent in the markets, what does that mean for the rest of us? As we are (re)learning almost daily, the market is a wild beast and once it turns, it can and does bring significant losses as well as gains. And while mostly in my life the market has been much like the 1,000 days preceding Thanksgiving, it can and does eventually become day 1,001. Be careful out there. Risk is real.