Why Seemingly 'Safe' Investments Are Secretly Ticking Time Bombs

The Turkey Problem

What if everything you thought you knew about risk was wrong?

I heard a fund manager last week proudly say his portfolio had outperformed the market for five straight years with lower volatility.

"It's all about finding stable, predictable companies," he said confidently.

I nearly choked on my coffee.

Here's the uncomfortable truth about seemingly "safe" investments: many are secretly ticking time bombs disguised as prudent choices.

And what I'm about to share might make you reconsider everything you've been taught about safety in the market.

But sometimes, uncomfortable truths lead to extraordinary insights.

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The Turkey's Delusion

Nassim Taleb tells a story that brilliantly illustrates our blindness to risk.

Imagine a turkey being fed by a farmer every day.

Each feeding confirms to the turkey that the farmer cares about its welfare.

This pattern continues for 1,000 days, reinforcing the turkey's belief that all is well in the world.

Then Thanksgiving arrives.

For the turkey, this unexpected event is a shocking "Black Swan" - but for the farmer, it was the plan all along.

This, in essence, is the Turkey Problem.

The fact that something hasn't happened yet doesn't mean it won't happen tomorrow.

And in investment terms? That stable company with five years of increasing dividends can collapse on day 1,001.

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The Mathematics of Surprise

The problem is deeper than simple oversight. It's about a fundamental misunderstanding of risk.

Most investors evaluate safety using historical data - volatility, drawdowns, and past returns. But this backward-looking approach is precisely what makes them vulnerable.

Howard Marks captured this brilliantly: "Being too far ahead of your time is indistinguishable from being wrong."

Similarly, mistaking the absence of evidence (no crashes yet) for evidence of absence (crashes can't happen) is a catastrophic error.

Low volatility doesn't mean low risk. It often means hidden risk.

The most dangerous risks aren't the ones that fluctuate daily but the ones that lurk in the shadows, building pressure until they suddenly explode.

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Financial Turkeys Among Us

Where do these financial turkeys hide? Here are three common habitats:

1. Low-volatility stocks that appear "safe" until an industry disruption renders their business model obsolete overnight

2. "Uncorrelated" alternative investments that remain stable for years until suddenly everyone needs liquidity at once

3. Fixed income instruments from issuers who never missed a payment... until they did

It's not that these investments are inherently bad. It's that their perceived safety creates a dangerous blind spot.

As Taleb would say, we confuse the absence of evidence with evidence of absence.

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The Fragility Trap

The central insight of Taleb's work is this: What appears robust is often fragile.

True robustness doesn't come from eliminating all volatility. It comes from becoming "antifragile" - positioned to benefit from disorder and unexpected events.

This requires thinking beyond simple diversification. It means:

• Maintaining dry powder for when opportunities emerge from chaos

• Focusing on investments that benefit from volatility

• Understanding your true time horizon (hint: it's probably longer than you think)

• Building convexity into your portfolio (limited downside, unlimited upside)

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Building an Antifragile Portfolio

So what's the solution? Stop trying to predict Black Swans (you can't) and start building systems that can survive or even benefit from them.

Ask yourself:

1. What assumptions am I making that, if wrong, would devastate my portfolio?

2. What investments do I own that have never been tested in a true crisis?

3. How much of my safety is dependent on conditions staying the same?

Remember: The goal isn't to predict the unpredictable. It's to survive whatever comes your way.

As Charlie Munger wisely noted,

"All I want to know is where I'm going to die, so I'll never go there."

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The Last Word

The most dangerous words in investing aren't "this time is different."

They're "this has always worked."

Past patterns are not guarantees. They're just data points from a specific set of conditions that may not hold tomorrow.

The turkey was fed 1,000 times. Until it wasn't.

Have a good week,

Dom
Founder & Chief Investment Officer
Schwar Capital

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Question: Have you ever owned an investment that seemed perfectly safe until it suddenly wasn't? What warning signs did you miss? Share your "turkey moment" below - I read + respond to every comment! 💡

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Disclaimer: The content provided in this newsletter is for informational purposes only and does not constitute financial, investment, or other professional advice. The opinions expressed here are those of the author and do not necessarily reflect the views of Schwar Capital. Investing involves risk, including the possible loss of principal. Past performance is not indicative of future results. The author may or may not hold positions in the stocks or other financial instruments mentioned. Always do your own research or consult with a qualified financial advisor before making any investment decisions.