Macro commentary by eToro analyst for Romania, Bogdan Maioreanu
Black swans are rare and unexpected events with severe consequences and the potential to cause a change in a formerly held belief or system of beliefs. The term was coined by Nicholas Taleb in his book, “The Black Swan”. However, the origins of the term “Black Swan” come from a Latin expression used to describe something as being a rare event, nearly impossible. Taleb notes the three defining attributes of a black swan event: an unpredictable event that results in severe and widespread consequences, and after its completion, people will rationalize it as having been predictable (known as hindsight bias).
Very often the 2008 global financial crisis is given as an example. It started with the collapse of Bear Stearns, creating a domino effect that caused Lehman Brothers to file for bankruptcy — the largest bankruptcy filing in US history. Other companies also followed, including AIG, Countrywide Financial, and IndyMac. Over $10 trillion was eventually wiped out from the global stock market.
A black swan event usually seems to have a negative connotation, but that is not always the case. Whether the event is positive or negative depends on the perspective of each party involved. In 2008 not everybody lost in the crisis. Some investors saw the massive sell-off as a chance to increase their positions in the market at a big discount. Warren Buffett, John Paulson, and Carl Icahn are often cited as the top 5 investors who profited from the global crisis.
Even in recent days in Romania, the correction of the Bucharest Stock Exchange created opportunities for investors to buy stocks at a discount as soon as the uncertainty passed. The BET Index rose almost 3% on Friday, after the Constitutional Court decision to cancel the first round of the presidential elections and by another 2% yesterday.
Other examples of black swans in recent history are Brexit in 2016, which caught a lot of people by surprise, and also the Global Pandemic in 2020. The last one came totally out of the blue, virtually shut down entire economies across the globe, and led to massive changes in people's lifestyles. It also created a violent correction in the global financial markets. But again, the positive side was that the pandemic led to the rise of retail investors. With a lot of time on their hands and a drop in expenses, a lot of people started to read about investing and got interested in this fascinating field. According to eToro Retail Investor Beat survey, 37% of total investors have market experience ranging from 3 to 5 years which means they have started investing during the pandemic period.
While what happened to the stock markets during the pandemic was seen as a black swan event, the pandemic itself can be characterised as a grey swan. Grey swan events are predictable but unlikely to occur. Pandemics are a rare but well-acknowledged risk that the world has experienced repeatedly in the past. Other examples of gray swans might be climate change or the rise in world debt, which we are aware of but do not see their immediate consequences yet, or fluctuations in oil prices due to geopolitical tensions that can often be anticipated, but their impact on global markets remains uncertain.
The flock of swans would not be complete without a white swan. White swan events are expected ones that investors can plan for, such as regular earnings announcements or seasonal trends in certain sectors. Understanding these predictable events facilitates smoother investment strategies and is the bread and butter of the markets.
While there is no guarantee for future behavior and results, history showed that regardless of the flocks of swans that flew over, the global stock markets found the strength to rebound. Also, while some events cannot be avoided, there are methods that investors can implement to prepare, like portfolio diversification and having a bond component in their investments but also various methods to hedge the risks.
