Salads have rarely been so expensively dressed after a combination of drought and disease has pushed the price of olive oil up 10% so far this year, amid warnings from suppliers that harvests are the worst they have seen.
In Italy, a deadly bacterial disease has resulted in approximately 1 million ancient olive trees being felled in an attempt to contain the problem.
This problem brings up the obvious issue of supply and demand, which will drive up the price of olive oil around the world, but it also struck me that for these Italian olive grove farmers this is a ‘Black Swan’ event. These olive trees will be centuries old and the farmers will have cultivated these crops year after year with very few problems for generations. Now they are finding that an unexpected issue can decimate their life’s work, and their family’s livelihood.
Naseem Nicholas Taleb coined the phrase in his eponymous book. Black swan events are very rare and unpredictable happenings that can lead us to being fooled by randomness.
Every so often there are financial ‘innovations’ when new investment products are conceived. The investments are tested out and the firms that market them to investors believe that they cannot fail. But history is littered with many booms and busts. The run up to the credit crisis was built on American sub-prime mortgage holders and many were convinced that the US housing market would continue to grow and grow. Unfortunately, these ‘experts’ forgot about reversion to the mean, and we are still dealing with the aftermath today. Just like the Italian olive tree farmers have found out – black swan events can, and do happen.
History has a habit of repeating itself and very rarely has something not happened before. Investors should treat most new financial products with a healthy dose of skepticism. Secondly, if the problem is widespread, then this is when the power of diversification is invaluable to a portfolio.
At Callisto, our investors know that we only invest in funds that have a direct link to the rate of return generated, which means investing in equities for growth and bonds to dampen down volatility to a suitable level. Very broad diversification also helps to reduce risk. Whilst the fallout from another financial Black Swan event cannot be avoided, the risk of it producing a disproportionate loss can.
Let’s hope that the Italian olive farmers can re-plant or find a cure for the disease and we may not face a price hike at the supermarket.