David Lerner Associates – Black Swan Investing: Counting on Catastrophe
Events like these are referred to as Black Swans. They are the random, unforeseen events that deviate so widely from what is normally expected that virtually nobody is prepared for them. Another characteristic of Black Swan events is thatthey are often viewed in hindsight as if the events could have been expected. After the fact, observers come to believe that the signs and relevant data were all there, but not accounted for.
Finance professor and former Wall Street trader Nassim Taleb coined the phrase in his 2007 book, The Black Swan: The Impact of the Highly Improbable. Taleb uses the attacks of September 11, 2001, as an example of an event that was virtually unthinkable at the time but which has resulted in ramifications that continue to be felt, from increased security measures to wars in the Middle East.
“In the world of investing, these events are noteworthy because their impact can be felt around the world, often causing substantial declines in investment markets,” notes David Lerner Associates Branch Manager Jonathan Hurwitz.
Yet Hurwitz is quick to point out thatBlack Swans can also represent favorable opportunities. For example, Swiss drug maker Roche Holdings and its investors profited unexpectedly when the avian flu scare early in the new millennium caused sales of Tamiflu—a drug once considered a dud—to soar. An event that few could have predicted generated substantial profits as governments around the world scrambled to stockpile the antiviral drug.
“Good or bad, the common denominator with Black Swan events is that you can’t see them in advance and often can’t even contemplate them,” says Hurwitz. In fact, Black Swans are so unlikely that those who are able to “dodge the bullet” often consider themselves lucky, while those who improbably bet on them occurring may reap handsome rewards.
But in a world where random events can create an unpredictable investment environment, Hurwitz notes that diversification may be a smart move. Rather than attempting to predict what the market will do next, he suggests that investing in a well-diversified portfolio may provide some degree of protection from Black Swans.
Material contained in this article is provided for information purposes only and is not intended to be used in connection with the evaluation of any investments offered by David Lerner Associates,Inc