Black Swan events: never try to predict the unpredictable

Hindsight is 20/20, right? The Global Financial Crisis, Trump’s election and the rise and fall of Bitcoin all seem obvious enough in retrospect. But here’s the thing: very few people ever make money from random and unexpected events, despite many trying!

Black Swan events are ones that are almost completely unpredictable yet have profound and lingering effects on people – not to mention a disproportionate amount of people trying (and failing) to cash in on them.

The origin of the term

The term was recently popularised by Nassim Nicholas Taleb, a finance professor, writer, and former Wall Street trader.

But it dates back much, much further than that.

In fact, the term ‘Black Swan’ dates all the way back to the 2nd century when it was coined by Roman poet Juvenal.

It was written in Latin, and when translated to English, went something along the lines of “a rare bird in the lands and very much like a black swan”.

The phrase was pretty common for something ‘impossible’ in England during the 16th century, when it was still assumed that only white swans existed.

However, in 1967 Dutch explorers became the first Europeans to see black swans: in none other than Western Australia.

As a result, the term morphed into a saying for something that was once deemed impossible but later disproven.

What is a Black Swan event nowadays?

As mentioned earlier, Taleb popularised the phrase once more around the turn of this century.

He did so with his book ‘Fooled By Randomness’, which concerned financial events, and again with his 2007 book ‘The Black Swan’, which highlights events outside the financial sphere.

Taleb says Black Swan events are made up of three key attributes.

First, they are an outlier – basically an event that’s so outside the usual that no past indicators could have pointed to it as a possibility.

Second, they have catastrophic ramifications on the world. And third, despite being completely unpredictable events, we humans try to rationalise them as something that should have been completely predictable after the fact.

Examples of Black Swan events

– The unprecedented rise and fall of Bitcoin in 2017.

– Donald Trump’s run to the White House in 2015-16.

– The Global Financial Crisis in 2008.

– The dot-com bubble burst of 2001.

So why don’t Black Swan events make for good investments?

In a nutshell: the horse has usually already bolted.

You see, by nature Black Swan events cannot be predicted.

To successfully predict one, you’d need to either get extremely lucky, or bet on a large number of speculative investments until one finally worked out – and neither are sensible investment strategies.

And by the time people usually want to put their hard earned money towards it, so has every other man and his dog and the market becomes extremely unstable (think Bitcoin 2017).

That’s why when you invest you shouldn’t waste time, money and effort trying to predict the unpredictable.

Because if you see something that walks like a Black Swan and grunts like a Black Swan, it probably is. And it’s therefore worth checking with us before you put your savings on it.

Where you should focus your attention

Your focus should always remain on the things you can control.

They include your risk profile, investment horizon, fees and tax structures.

By planning ahead you can stick to the things you know and leave the speculation to those who have left their run towards retirement way too late.

And if you haven’t started planning your run to a blissful retirement yet? Get in touch. We’d love to show you how you can live your ‘golden years’ without having to try and get lucky striking gold.

Disclaimer: The content of this article is general in nature and is presented for informative purposes. It is not intended to constitute financial advice, whether general or personal nor is it intended to imply any recommendation or opinion about a financial product. It does not take into consideration your personal situation and may not be relevant to circumstances. Before taking any action, consider your own particular circumstances and seek professional advice. This content is protected by copyright laws and various other intellectual property laws. It is not to be modified, reproduced or republished without prior written consent.

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