EduCounting

Black Swan in Finance

Money and Black Swans don’t mix.

Black swans are pretty birds.  You don’t see them every day in the US.  There have been sightings of the bird in some places in California as well as Florida. Maybe they escaped from a zoo or private collector.  Either way, they’re a bit rare and were never in the US until maybe 100  years ago as an oddity.  This website is dedicated to money, so what’s a black swan have to do with our discussion of cash? Well, there is a bit of a back story. So, we’re going off course, but we found it interesting and hope you do too…..

Black swans are native to Australia, so if you were around before the 1800s and didn’t live in the area, you wouldn’t have ever seen one.  Can you imagine if you were an explorer, who happened to come across one, and you thought there were only white swans?  You might not have believed your eyes or thought it was some sort of mystical creature, or worse yet a curse (like a black cat, which meant bad luck was on the way!!).  However, if you were in the right place (Swan River), you could have seen hundreds of them. I mean HUNDREDS.unicorn This wasn’t like a mermaid which was believed to have been the mistaken identity of a manatee who lumbers through the water, and has the nickname “Sea Cow”.  I always thought mermaids were supposed to be half fish and half beautiful women.  So, either a sailor’s eyesight was REALLY bad, or maybe they had a bit too much rum like Jack Sparrow.  Anyway, a group of Dutch explorers found the black swan in Australia in 1796.  They must have thought they’d seen something equivalent to a unicorn (However, they were black and much smaller and had only two legs. But, you get the idea).  For Europeans, these were NEVER seen before animals. It would change the way anyone studying animals would’ve have thought about the world.

Even though Europeans had never seen a black swan, it didn’t mean they didn’t exist.  They were talked about by the aborigines for a lot of years.  As the tale goes, there were two brothers who were turned into white swans to help an attack party during a raid for weapons.  I guess no one would have thought twice.  The story got my attention….. A crystal stone was used to transform the brothers. It’s starting to sound a bit like Harry Potter.  

After the raid, which I believe went well, a couple of eaglehawks saw the swans. I’m not sure if they were enemies, were hungry, or that eaglehawks love to pick fights with other animals.  Anyway, these particular birds had it out for the swans and tore the feathers right off the birds.  You have to understand that crows were the enemies of eaglehawks.  The crows came to the aid of the bleeding swan brothers.  Since they didn’t have feathers, the crows graciously gave them their own black feathers to cover them.  There you have it.  That’s how the black swan came into existence.

 

That’s a lot of information. But, throughout history, we believe things because we’ve never seen in real life.  Germs and radiation weren’t real either.  But, they killed a lot of people and when they were discovered, they changed the world.  The black swan had been used since Roman times as a symbol of “impossibility”.  It would be the equivalent of using the saying “X, Y and Z would happen when pigs fly”.  IMPOSSIBLE….

Pig Flying

Interestingly enough in 2007, we have a guy that writes a book about a new concept called the “Black Swan Event”.  Nassim Taleb (the author) was a Wall Street Trader and Finance Professor.  A Black Swan event had three main points:

  1. Something RARE has occurred. 
  2. It had a HUGE IMPACT on us.
  3. In retrospect, it was relatively easy to EXPLAIN.

Note: Take a listen to our podcast for more here:

In finance, we’ve seen several of these.  Most of us want to forget about them. About a year after the book came out in 2008, we had the 2008 financial crisis.  It was something we’ve never seen before (RARE).  It had an incredibly detrimental effect on the world (HUGE IMPACT). In retrospect, it was pretty easy to EXPLAIN AFTER THE FACT.  Too many people were easily gettingWWI Tank too many loans on real estate that they couldn’t actually afford.  They called it easy money when it is easily obtainable. That was a Black Swan Event.

Some events may even be debatable as to whether they qualify.  COVID, for instance, per Mr. Taleb, is not something he said qualified as a Black Swan Event.  Probably due to the fact that pandemics do happen.  Not often, but seemingly not rare enough.  He mentions the following in his book:

  1. The internet
  2. September 11th
  3. World War I

 

Normally a black swan event doesn’t end well.  However, they don’t necessarily have to be bad (just ask the black swans in Australia).  For finance and money, they are generally bad news.  For those of us who were around, we’ve seen the dot-com bubble.  It occurred during the early stages of understanding what the internet could do.  Valuations of stocks for these internet-based companies took the Nasdaq from 1,000 to 5,000 from 1995 to 2000. That’s insane.  It came crashing back to around 1,100 in 2002. It was painful.

We can’t forget that September 11th had affected the markets globally with sharp declines.  Black Monday, was in 1987 which dropped the Dow by almost 23%.  Yikes.  And you have to mention the Stock Market Crash of 1929. Yes, it’s a much longer story, but everybody has at least heard of it, and it had several “Black” days, that were rare, significant, and explainable after the fact- Ding ding…Black Swan Event.

Stock Market Crash

As an investor, you have to “expect the unexpected”.  A portfolio (collection) of investments should be set up in a manner to be able to at least assist in weathering through challenging times.  Particular examples include diversifying your investments, monitoring them on a regular basis, and re-balancing them when necessary. Sometimes you need a professional or at least a little education.  Hey, those are some technical terms.  If you’re interested in learning more, check out our Stocks and Bonds course (Mak & G Stocks and Bonds).  It won’t make you a professional, but it will lay some really good groundwork. And, remember black swans aren’t bad, and when companies are “in the black” that’s a GREAT thing!!

Scroll to Top

Join our email list