What Is A Black Swan Event & Are You Ready For The Next One?

What Is A Black Swan Event 

& Are You Ready For The Next One?

So far, 2011 has been a year plagued by a handful of unexpected events that have had a widespread global impact. The events are called “black swans.” History shows that black swan events, while rare in their frequency, have a significant influence in shaping the world we live in.

The term black swan can be traced back to the 2nd-centuryRoman poet Juvenal. He wrote that some events are “as rare a bird as a black swan.” Though black swans existed and weren’t a rarity, during that time no European had ever seen one (explorers found them in Australia centuries later). The term was popularized again in thanks to Nassim Nicholas Taleb, author of “The Black Swan: The Impact of the Highly Improbable.” This best-selling book was released in 2008 and it describes how the world is severely affected by these rare events which are difficult to predict.

You’re familiar with most Black swan events because they have had a major impact in shaping your life. Examples include: World War I, the Depression that began in 1929, the personal computer, the rise of the internet, the September 11 attacks, the collapse of Bear Sterns and Lehman Brothers in 2008, etc.

The events that have taken place in North Africa, the Middle East, and Japan are black swans. Few, if anyone, predicted these occurrences and their impact has been felt globally.

In just the first quarter of 2011, MENA (Middle East North Africa) has been turned upside-down. The leaders of Tunisia and Egypt were forced out of power by social unrest in just days, though they had ruled for decades. Presently, there is a civil war going on in Libya and protests have hit Bahrain and Syria. This turmoil has pushed commodity prices higher, especially oil, which is affecting everyone around the world.

Japan was hit with a massive 9.0 earthquake which resulted in a tsunami. Thousands of people lost their lives and Japan is still battling with damaged nuclear reactors that are spewing radiation. This has caused governments around the world to reassess nuclear power and call for nuclear plants to have major safety overhauls.

Black swan events are often rationalized in hindsight, as if they should have been expected. Often when I talk to people about the financial collapse that occurred in 2008, they act as if it should have been predicted by everyone because of how easy it was for to get a loan and the exponential rise in real estate prices. However, most of those same people didn’t sell their stocks or their homes in 2008 and have suffered the consequences.

There are some investors, like John Paulson, who were able to predict the black swan event in 2008 and capitalize on it. Paulson is the founder and president of Paulson & Co., a New York based hedge fund. A smart, successful but relatively unknown investor from Queens, NY, Paulson began betting against the US mortgage market in 2006. In 2007 and 2008 he increased his investments, betting against not only mortgage backed securities but also the banks. As a result of predicting this black swan event, Paulson made billions of dollars for himself and his investors.

Black swan events are not easy to predict and the vast majority won’t profit from them. However, if you are one of those people that are able to anticipate these unexpected occurrences, you can exploit the situation and prosper.

What do you think could be the next black swan event? Do you invest in a manner in which to capitalize on such occurrences? Do you think trying to position for a black swan event is futile? Email me at matt@thestockenthusiast.com