How to Profit from a Black Swan Event

A black swan is an unthinkable event that has a major effect in one’s life. It was coined by Nassim Nicholas Taleb. Examples of black swan events would be the Sept 2011 terrorist attack and the market crashes that has happened in the past or will happen in the future.

A market crisis happens on the average of once around every five years. The last market crash that happened was during the Great Financial Crisis of 2007-2009. With such crises happening at random and being hard to predict, how are we going to position ourselves to take advantage of such black swan events?

Firstly, we must not borrow to invest. If we were to do so, our emotions will affect us when a crisis happens and we will not be able to act decisively. During the time when we should be buying more, we will end up losing money by cutting losses due to emotional stress. The emotional stress might cause other areas of our lives to be affected as well.

Next, we have to save enough money so that there will be surplus cash that we can deploy into the market. It is prudent not to be fully invested at all times so that we can take opportunity of a market crash or even a small market correction. Socking up cash in the bank is not a bad thing after-all if we know what we are doing. The cash serves as an opportunity fund, ready to be put into work when the time arises. It is better to keep the cash in the bank earning 0.05% interest than not to have any money at all when the market throws at you a business valued at $1, selling at $0.20. I like to keep at least 20-30% in cash to take advantage of market crashes.

Lastly, be on the lookout for opportunities that are thrown up frequently. When the opportunity comes, we have to load up on it as opportunities do not knock twice. For example, during the BP oil spill (a black swan event), many oil stocks went down in price even though they were not involved in the spill. It would have been a great opportunity to grab such stocks on the cheap, provided they are fundamentally sound.

In conclusion, black swan events do not have to be dreadful. We can take advantage of them if we know what to do and in turn, do our portfolio a huge favour!