What is a black swan event, are we in one, and if so, what should you do?

Talking about Black Swan events has become common as the phrase has entered the general English language lexicon and most people are generally familiar with the term. However it does have a specific meaning, and an interesting history, that is linked to The Netherlands!

Across Europe, there are only white swans. Up until the 17th century, therefore, in Europe the fact that all swans were white was irrefutable. Scientists and those readers au fait with research theory will recognise this as the model of flawed hypothesis construction.

It took the sighting of one black swan by a Dutch sailor in what is now Western Australia in the 1600s to destroy that European ‘fact’.

The Black Swan theory then is the theory of how one piece of data- the existence of a black swan in Australia in the 17th century- can destroy a hypothesis, a belief system and an entire model (the belief in Europe that all swans were white).

It shows that economies and markets can be, and indeed are, unpredictable and unstable because at any point in time whilst we may think we are operating on all the information and irrefutable truths, a new piece of information may render our truths, wrong. This is why we believe our independent investment advice is important. From our perspective in helping our international clients, it is not about predicting the future or controlling the events, it is about being prepared for their impact, having contingencies (or as Taleb states being ‘antifragile’) and being ready for the opportunities they may present.

Black Swan Events were named by Nassim Nicholas Taleb in his book The Black Swan, an interesting and recommended read if you would like to learn more about it. He defined a Black Swan Event as having three attributes:

• First, that it is an outlier event and not a regular occurrence. A Black Swan Event is unlikely, and up until that point of time, maybe even not even considered as a possibility.

• Second, it has extreme impact. Think the 1987 stock market crash, and its subsequent recovery.

• Third, people tend to give it retrospective predictability (but never in advance). 

 A Black Swan event can be positive or negative. The invention of the internet, or of mobile communications could be considered Black Swan events. As could the invention of the Spinning Jenny or the internal combustion engine a couple of centuries earlier. An example of a negative Black Swan is the unravelling of the collateral debt obligations that led to the 2008 economic crisis, although some may argue that this could be foreseen.

Equipped with the definition of what a back swan event is, we address the question, ‘are we experiencing a black swan event now’?

The answer is, that it is debatable. On the grounds that it was largely unforeseen, and that the impact may be material, the US & Israel – Iran war may be considered a black swan event. Arguments against will state that there was a risk this could happen, either from the recent US and Israeli rhetoric, or that perhaps it had been a risk since the 1979 kidnapping at the US embassy and subsequent regime change and installation of the first Ayatollah. Therefore, it was foreseen and not a black swan event. The confusion is retrospective predictability can be mis-directed as foreseeable. The basic test for this is whether the risk was being discussed prior to the event. In recent months it was largely not. On balance therefore, the war, and the secondary impacts such as increase in energy prices, attacks on third states such as the UAE and disruption to international trade, may be considered a 2026 black swan event.

More important that whether it is or is not a black swan event by definition, is what you should do about it.

We have had numerous discussions with clients over the last weeks. Every discussion is different and this highlights the first thing we recommend you do: seek advice that is specific for you, from a professional. You can speak with us at Black Swan Capital. To determine if you should take action and what you should do in relation to current events, you first need to assess your objectives- what you are trying to achieve, and in what timeframe. Second, we can assess the impact on you specifically which can be anywhere from irrelevant, to materially negative in one direction, to opportunistic in the other. 

At Black Swan Capital when giving financial advice and implementing financial plans for our clients we always factor in for unexpected events. Whilst this is good practice and applicable to everyone, it is especially so for expats and internationals.

The process of guiding our clients towards their goals whilst having contingencies for Black Swan events is vital in our service to our clients.

If you are concerned about current world events or wish to understand how events may impact your financial plans, speak with us.