Kenneth Posner — How Retail Investors Can Win in a Pond of Black Swans

So popular was Kenneth Posner’s interview with The Wall Street Cheat Street that they asked him back again.

In the interview Kenneth Posner, author of Stalking the Black Swan: Research and Decision Making in a World of Extreme Volatility discusses:

* The top 3 ways retail investors can deal with black swans;
* A prospective black swan Posner is monitoring now; and,
* What we need to see in financial reform to avoid more black swans.

In addition to their review The Wall Street Cheat Sheet also asked Posner to list six ways to avoid black swans:

1. Cut government debt, a potential cause of extreme outcomes. Politicians should focus on this rather than blaming markets, which reflect volatility but do not cause it.

2. Place Fannie Mae, Freddie Mac (NYSE: FRE), and the Federal Home Loan Banks into run-off and reduce US government liabilities by some $7 trillion.

3. Build “shock absorbers” into the system like mandatory “contingent capital” for systemically important financial firms, rather than proscribing activities for banks and hedge funds.

4. Impose shorter term limits on the Federal Reserve Chairman’s service because too much trust in the persona can contribute to excessive volatility (the “Greenspan put”).

5. Improve corporate governance to mitigate the problem of ”cognitive dissonance,” when successful executives dismiss new data that contradicts deeply held-beliefs, evidenced by Goldman Sachs’ (NYSE: GS) missteps in reacting to the SEC lawsuit and managing the firm’s political vulnerability.

6. Return to fundamental research, a practice that executives, risk managers, and individual investors should follow to better understand the macro and micro causative factors likely to affect a company’s performance.