A Google (GOOG) earnings report that was released early caused the stock to drop by 9% today, and shares were subsequently halted. As of 1:25 p.m. ET, Bloomberg reported that Google has blamed the early release on it's printer R.R. Donnelley (RRD), whose stock is also down on the news.
Based on Google's current market cap, this drop represents about $20 billion in value wiped out, supposedly by a "mistake." Details of this error are still unclear, but whatever the outcome it sends a scary message to stock investors: We are always one human error away from catastrophe.
While this was a big drop, Google was below $500 in 2011 and below $400 in 2009. While this is a significant drop for Google in one day, it is still up on the year. If it is true that the release was a mistake, nothing fundamentally changed with Google.
Human error is not uncommon in the markets. Recently, a so-called "fat finger" error caused unusual swings in the stocks of oil companies. Knight Capital Group (KGC) had a software glitch that rocked the markets and caused a $461 million loss for the company. Earlier this year, the price of gold (GLD) was down on a similar fat finger error. While the nature of so-called fat finger errors are of a different nature than what allegedly happened today, they both have the same message to investors: Human error can cause a strategy to lose, even if everything on the surface looks solid.
Black Swan Events
Of course, most investors know that there's always a possibility of something unlikely happening that can cause a strategy to lose or perform unexpectedly. However, many of these human mistakes seem to form a pattern. Black swan or fat tail events are those that are uncommon, unpredictable, and rare.
So as more and more of these events happen, it is less of a black swan event and more of a calculable risk of strategies that rely on humans. More specifically, companies such as Google rely on multiple non-correlated networks of humans through third-party vendors such as R.R. Donnelley and others. Any malfunction in these systems, which rely on execution by humans, can have catastrophic results such as we saw today.
The Human Element
The thread of this line of reasoning is not to present some non-human alternative. Humans are responsible for running the global economy. But a plane doesn't fly on human ability; it flies based on computer systems with updated information that do most of the mechanics of flying. Simply, investors need to calculate the "human element" in their investments, including investing in any stock that is subject to the management of the company (or in this case, the vendors) and any investment where another manager is responsible for execution. So this applies not only to stock investments, but also to investments where selected managers are responsible for execution such as hedge funds, CTAs, and other investments.
Today's event can be a learning tool for investors and traders to calculate the human element, as well as putting protections in place to hedge this type of situation as much as possible, such as investing insurance. For example, if you are long Google, you might want to purchase some long put options deep out of the money to protect yourself in the event of some serious situation such as what happened today.
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