Unpredictability in Markets

Dec 21, 2018 | Dr. Patrick O’Brien DVM, Wealth Advisor at RBC Dominion Securities Inc.


This post is about the downturn currently affecting markets of every kind from real estate to technology. I discuss market variability and our desire to avoid the downturns through the lens of chaotic system analysis.

RBC Wealth Management Maple Ridge Volatility

The recent downturn in just about everything has me thinking about markets and how nice it would be to be able sidestep the downturns and be there for the upswings. The markets are an example of a type 2 chaotic system where the current situation and market sentiment changes the future (continuously). It is similar to the Heisenberg uncertainty principle that says we can’t say exactly where an electron is because just the act of looking for it, moves it. As a result, we can only generate orbital fields of where the electron in an atom spends most of its time.

An example of a type 1 chaotic system would be the weather. We are reasonably good at predicting it and our measurements and expectations don’t change the upcoming meteorology. Yesterday we had a big wind storm shutting down the ferries and causing power outages. The fact that we knew it was coming, and that we took evasive safety precautions had no effect on the storm’s wind speed, direction etc.

So what to do if we accept the markets as a type 2 chaotic system? I invest a large part of my portfolios in human needs because our basic human physiology is not changing. All of us will want to keep warm this winter, will continue to pay our ever increasing cell phone bills, rent etc. These basic needs aren’t going away and when they are coupled with companies that own physical assets such as a hydro dam, we have a buffer to the next downturn but also participation in the next upturn.

Thanks for Reading and Happy Holidays to all of you!

Reference: "Sapiens" by Yuval Harari 2014