Black Swan Theory & Investing
A Black Swan is commonly referred to as an event in history that was, at the time, unprecedented and unexpected. The term originates from the 16th Century knowledge that swans were white and black swans presumably did not exist. However, in 1697 the Dutch explorer Willem de Vlamingh discovered black swans in Western Australia. This event forever changed the way zoologists and scientists viewed current knowledge and the unexpected.
In his 2007 book “Black Swan”, Nassim Nicholas Taleb introduced the Black Swan Theory and described it as events that are completely unpredictable and unexpected. These events then have an extreme and lasting impact on those affected. Black Swans are then rationalized by hindsight, after the fact, as if they were not a surprise. Recent examples include the stock market crash of 1987, the terrorist attack of September 11, 2001, and the Financial Crisis of 2008.
How it Relates to Investing
The Black Swan Theory is a great reminder that we must expect the unexpected when building and maintaining a portfolio. By definition, we cannot predict every Black Swan that may come along. However, we must stay adaptable so that not only do we survive such Black Swans, but that we’re also in a position to capitalize on the opportunities that may arise from them.
