The concept of Black Swan was popularised by acclaimed author Taleb in his bestseller book “Black Swan”, a book which I think every serious investor or businessman must read. This blog is written with the view of providing remedies to such Black Swans – which are low probability but high impact event which can happen in the markets or in the life of investor and how to prepare for the same.

The concept of Black Swan is something that I spend a lot of time on. Firstly when we talk about Black Swan we don’t mean cyclical/bear market corrections which happen frequently as black swan events by definition are much more impactful and something which most people have not even thought about. Some examples of real black swan events are: War with a nuclear attack on Delhi/Mumbai/Bangalore, World War 3, Aliens actually coming to conquer the Earth, big time Metroit attack leading to a severe impact on a major part of the World, Artificial intelligence taking over the human race etc., global warming gulping down several of the World’s major cities etc.

Other black swan events may be like 1929 depression where I think Dow Jones index took 25 years to recover (2009 was nothing in comparison to it in my opinion). I can feel sorry for anybody who was in a stock market career in those 25 years (as long as a full career).

Few points which are important during such real black swan events are as follows:

  1. Acceptance of Fate – this is something even Taleb has written about, while we haven’t really seen any major black swan event since last 40+ years. But when it will happen, anything can happen. Imagine a nuclear war between India and China for instance – in one go many of your loved ones may not be anymore, stock markets may not function for many months/years and any other thing may happen. In such a scenario, if one is alive, I think the journey first starts with acceptance of what has happened and not continuing to brood over the past life.
  2. Multiplicity of skills – If one survives, and especially for people who are full-time investors, stock markets may not be the place to be for many years (inadequate returns, lack of third party money to manage etc. etc.). Hence having a diversified skill set (say one is a great cook and good investor) will help you earn through this period. Also, psychology tells us that have multiple identities is a great way to cope up when one identity is gone or becomes useless. So in general, people having a wholesome life (a bit similar to the diversification of portfolio) will be able to go through this better than singularly focused stock market professionals.
  3. Avoidance of dollar cost averaging – Well, when a black swan event happens by definition there is no precedence so I would avoid entering stocks or investing in real estate until there are fairly sustainable signs of recovery and stability in the situation. I think dollar cost averaging may be a very dangerous strategy here. Even accounting wise, things like change in customer behaviour for multiple years can arise because of such events may be too hard to predict. For instance, Titan may start trading at 5 times trailing earnings but what if nobody is interested in buying Jewellery for the next 10 years because of the hardships they are undergoing (I am just giving a hypothetical example here).
  4. International diversification – I think some level of international asset diversification is a valid strategy but wouldn’t be suitable for most of the people with low net worth. Gold and cash are however great proxies. Yes, banks may even fail us and in fact, a lot of people do keep hordes of cash as they don’t trust banks fully.
  5. Staying in non-strategic locations – I do feel that in the case of nuclear attack, strategic locations and big cities are the most vulnerable from a missile or nuclear attack point of view. Ceteris Paribus, it makes sense to be slightly off such locations, if possible.
  6. Many others, this is being a subject of great interest to me. But enough discourse for now :slight_smile:

Overall, I feel the first step is to manage ourselves psychologically. Ofcourse, one must take steps for financial risk prevention as well, but with the knowledge that in case of a real black swan most of it may not be even valid.