Here at Investopedia we’ve been following Bank of America Merrill Lynch’s global fund manager survey since mid-2016. Every month, the team at BAML provides a wealth of information about professional investors’ mindset: what they think the most “crowded” trade is, how much cash they’re keeping in the powder shed, how their feelings about different sectors and markets have changed.
By far the most interesting question BAML asks, though, is what fund managers think the biggest “tail risks” are: the things that go bump in the night, that threaten to sneak up on global capital markets and swat them into an uncontrollable spiral.
In the moment, the ranking always makes perfect sense. This month the top answer was “inflation and bond crash,” followed by “Fed/ECB policy mistake,” “market structure” – okay that one’s a bit less clear – and “geopolitical tensions.” With all eyes on the CPI and central banks’ response to it, how could we not be a little afraid? (See also, The Recovery Eats Its Children.)
But look back through past months’ answers, and it’s fascinating how quickly the focus jumps from one cluster of risks to another. A sharp devaluation of the Chinese currency gives way to anxiety over QE tapering. Then it’s U.S. politics, the eurozone, the bond market, Chinese debt, protectionism, Brexit, North Korea. Some of the tail risks drop off the list because they actually happen: Britain voted leave, the U.S. voted Trump. Neither has (yet) caused lasting market turmoil, however, and for the most part, the anxiety fades as soon as a risk drops out of the headlines – only to be replaced by another.
Looking at this fickle, fearful depiction of the investing id, Warren Buffett’s admonition to be greedy when others are fearful comes to mind. People are always afraid of something. The next time a dire headline strikes fear into your heart, remember how quickly previous bouts of panic passed. Maybe even get a little greedy. (See also, Warren Buffett Biography.)