Expectations: Dealing with the Black Swan
Sometimes we get so enthralled with an idea that we ignore the potential hazards that may accompany it.
It was back in early March 1980 when Bill, one of two master sergeants assigned to assist me in running and maintaining the T-10 simulator at Minot AFB, introduced me to the then little known, over-the-counter silver market. His last name escapes me.
That day I learned that his father was an established coin dealer in Rapid City SD and was heavily involved in the silver trade, specifically the bundling and sale of bags of silver coins having a face value of $1,000. I don’t know how the initial conversation got started but on the same day I learned that one of our contract engineers had purchased such a bag from Tom Fitzpatrick, the owner of Tom’s Coin, Stamp and Gem Shop in downtown Minot for $7,000.
At the time I recall expressing a mild interest but as news of the market was shared with me over the following weeks my attitude changed dramatically. It couldn’t have been a week after I first learned of this niche market that the price of those bags had jumped to $9,000. A couple of weeks later Bill shared with me that the price of silver on the commodity exchange had risen to nearly $38 an ounce and, as a result, the price of a bag had risen to a whopping $16,000.
I didn’t have the money to get in the market myself but in the course of our informal conversations I learned that Bill’s father was paying $1,000 to those who introduced him to new investors. When I heard that it immediately occurred to me that perhaps I could make a little money brokering a deal through a banker I knew downtown.
When I told Bill that I might be able to find an investor, he agreed to split the referral fee 50/50. On nothing more than a handshake, I made a quick call and to my surprise, the trustee was not only intrigued by the idea but went so far as to express an interest in approaching a couple of farmers he knew who were always looking for a way to leverage their investments.
A week or so later the banker called to ask for a quote. While he was on the phone, Bill made a call to his father who told him that he had three bags, that the going price was $24,000, and that he would guarantee delivery if taken by the close of business the following day — Friday, March 28. He added that he would be willing to fly into Minot and meet the buyers at their bank at 4:00 p.m. provided the bank faxed him a letter of credit and had enough cash on hand to consummate the deal.
It wasn’t a half hour later that I received a another call from the banker informing me that we had a deal. He explained that he had called to get a quote from Tom’s. Fitzpatrick was out of town but had left instructions to the store manager not to sell a bag for less than $27,000. Passing that information along to his clients, the banker then told me that he had been authorized to order two bags and was in the process of faxing the requested letter of credit and an additional letter stating that the bank had more than enough cash to meet the need.
The next day Bill left the office mid-afternoon to pick his father up at Minot International and to drive him to the bank. When they arrived the farmers (who it turns out were brothers) greeted Bill and his father at the banker’s desk. Following a brief introduction and a minute or two of chit chat, the banker/trustee poured the coinage into a machine behind the cashier’s window to confirm each bag’s contents.
Once validated, the trustee, accompanied by the branch manager and a clerk, walked to the vault to get the cash which, once delivered, Bill’s father patiently counted. No receipts were requested. No receipt was given. Soon thereafter, Bill returned his father to the airport. Once he had departed, Bill took time to call the office to let me know that everything had gone smoothly.
Naturally, I drove home that night quite jazzed about not only making some easy money but also fantasizing about how much could be made investing in silver myself. As it turned out, it’s a good thing that I didn’t pursue that idea.
Unbeknownst to me (and I suspect Bill and his father as well), late the preceding day, Thursday, March 27th, it was reported that Nelson Bunker Hunt and William Herbert Hunt, the sons of Texas oil billionaire Haroldson Lafayette Hunt, Jr. had been manipulating the world silver market. As a result, the following day (the very day the aforementioned sale was taking place) the commodity markets went into panic mode and the spot price of silver dropped from a high of $48 an ounce to less than $26. Naturally, the derivative market followed suit but since it is an informal, over-the-counter market the effect of this revelation didn’t really take hold until the following week.
Early the following Monday morning, Bill handed me five, one hundred dollar bills but that wasn’t the big news for the day. By close of business the price of a bag of silver had plummeted to a mere $12,000.
* * *
Thirty odd years later I happened to come across The Black Swan, a book written by Nassim Nicholas Taleb, who writes about the socio-economic impact of highly improbable events — events given hindsight that we convince ourselves were readily discernible but ignored. Anyone interested in managing his/her own investments would be well advised to read that book before he/she invests money in (or for that matter, devotes energy to) any speculative endeavor.