Oh baby baby it's a wild world,
it's hard to get by just upon a smile.
Oh baby baby it's a wild world.
- Cat Stevens on the log normal nature of capital markets
Something isn't normal in the market today. In fact, it wasn't normal yesterday. Come to think of it, it never has been. So perhaps, normal is not a particularly useful concepts for markets or for nature. It is good for modeling, but reality conforms to normal distribution curves rarely. If it did, here is what the world would look like:
Here is what the world looks like:
We live in a statistically wild world, baby. Like "unseasonably hot" weather in the middle of summer, unexpected things happen all of the time (that is, unexpected if you set your expectations to a normal distribution curve):
If you size risks based on downside, this is all fine. If you size risk based on volatility and the model for volatility is based on an expectation of normalcy, then sooner or later… you're dead.