A cow ate my hat...no seriously Grandad!

I was sipping a coconut and burying my toes leisurely into the warm soft sand. It was bliss. I closed my eyes and thanked my ancestors for giving me this moment of tranquility. The soothing smell of home made fish curry drifted gently through the air.

I’d swam all morning in the crystal blue Indian Ocean and now under the shade of a palm tree, I gently drifted off to sleep to the sound of gently crashing waves.

I woke up with a start. “Where’s my hat?”, I thought to myself.

My grandfather lent me his straw hat. He was very fond of this hat, but he was worried about me being in the sun.

I looked to my side and there it was.

It was being eaten by a cow.

Shit!

Only in Goa can you fall asleep on a beach and wake up to an Indian cow munching a gaping hole into your grandfather’s favourite straw hat.

These mishaps in life happen and there is no avoiding them because they can’t be predicted.

“There are known knowns; there are things we know we know. We also know there are known unknowns; that is to say we know there are some things we do not know. But there are also unknown unknowns — the ones we don’t know we don’t know. And if one looks throughout the history of our country and other free countries, it is the latter category that tend to be the difficult ones”

I bet Donald Rumsfeld got a few blank stares with this tongue-twister of a quote. But he had a point: there is only so much you can predict.

He may have been talking about the war on terrorism, but the environment he describes is similar to what investors face day-to-day.

Theories on risk that were originally based on natural observations have frequently gone out the window in finance. Events that were predicted to only occur once in several generations actually happened more frequently, such as every few decades.

However, it’s not just the measures of risk that have been challenged – the way investors look at risk has changed too. In the past, investment decisions were made based on the data available, which meant investors mainly took into account just the market risk they were exposed too. However, markets continue to grow and so has this data, albeit at an explosive exponential rate.

This more abundant and complex data, meant there were ways to look at risk differently. In other words, new sources of return could be made by taking on and managing this type of risk. It could be determined by the size of a company, the momentum of its stock price or its rate of growth.

However, there are some events that just happen. They might be easy to explain in hindsight, but they are generally unpredictable. Here, there is no real reward for being exposed to them. And, you generally don’t know you’re exposed until they occur.

This is the problem I had when I was the fourteen year old boy in this story. I was faced with an absurd but genuine situation that actually happened.

I felt like the kid who was about to tell his teacher, “Miss, my dog ate my homework”. The difference here was that the “dog” was an Indian cow and the “homework” was my Grandfather’s straw hat.

As I cycled home, I passed a stall on the side of the road, run by a fat Gujarati lady who happened to be selling straw hats.

“You’ve got a hole in your hat”, she said with a shrewd smile.

“I know, a cow ate it on the beach” I replied.

“That’s the most idiotic thing I’ve heard today”, she cried out laughing.

Before I could say a thing, she continued, “Ok half-wit, I’m going to sell you a new hat”.

I found an almost identical hat. And, after a long and annoying negotiating process where she royally ripped me off, I handed over a wade of old worn rupees notes.

Then five minutes later, a gust of wind blew my new hat off my head as I cycled home. It flew into a river and I watched it float away in despair. There are no black swans in India, but it look like there was on that river that day.

Oddly, my grandfather wasn’t annoyed. Instead he played a record on his gramophone after he laughed and forgave me. It was Frank Sinatra. The lyrics streamed out and filled the large airy hall we were in.