Black Swans

The following is from my book "Art of Investing 5th Edition".

This article on Black Swan events provides a retrospective and forward-looking analysis of significant, unpredictable events that have had or could have a major impact on the economy, markets, and society. I reflect on past events and offers predictions for potential future disruptions. Here's a review of the key points:

 

1. Historical Black Swan Events:

• 2000 Dot-com Bubble: I highlight the poor quality of Super Bowl ads and the small size of internet companies as indicators of the bubble. I personally shifted investments from tech mutual funds to traditional funds or cash, avoiding significant losses.
• 9/11/2001: The market plunged by 14%, and my stop-loss orders were executed, leading to losses. However, the economy recovered relatively quickly, and the event did not cause long-term economic harm.
• 2008 Lehman Brothers Collapse: The collapse of Lehman Brothers led to a 21% market drop. China's intervention helped stabilize the global economy. The event underscored the importance of diversification.
• 2024 China Housing Market Bubble Burst: I predicted the bursting of China's housing bubble far earlier than 2024, drawing parallels to the 2000 internet bubble.
• January 2025 Tech Stock Plunge: I speculated that DeepSeek (possibly an AI or tech-related event) caused a plunge in tech stocks, particularly affecting companies like NVDA. Despite the drop, I still believe NVDA's products will remain essential for AI.

 

2.       Future Black Swan Predictions (as of February 2025):

I outline several potential future black swan events, emphasizing the need for preparedness:

 

1.       National Debt Crisis: If the U.S. cannot service its national debt, it could lead to a depression. I mention Musk's efforts to cut expenses and Trump's tariffs as potential contributing factors. I estimated we could balance the budget by reducing half of our defense budget, half of the government employees, and  reducing corruption.

2.       Military Conflict: The possibility of Trump starting another war or using military force to capture foreign land is raised, though I hope this will not happen.

3.       Cybersecurity Threats: i warn that cyberattacks could cripple national infrastructure, emphasizing that this is a real and present danger.

4.       Economic Downturn: Inflation (partly due to tariffs) and unemployment (due to AI, robots, and layoffs) could bring down the economy.

5.       Social Unrest: High unemployment could lead to widespread social unrest.

6.       Bitcoin Collapse: I question whether Bitcoin is peaking and suggests that quantum computing or new NVDA chips could disrupt cryptocurrency mining. Outlawing Bitcoin by countries could also trigger a collapse.

7.       Decoupling from China: A total economic decoupling from China could have severe consequences, given the reliance on China for rare earth elements and consumer products.

8.       Corruption: I suggest that corruption within government agencies is a significant issue, with former government employees often getting jobs from companies they previously favored. Insider trading among politicians is also highlighted as a concern.

 

3. Themes and Takeaways:

• Unpredictability: This article emphasizes the unpredictable nature of black swan events and the importance of being prepared for the unexpected.
• Diversification: I repeatedly stress the need for diversification to mitigate the impact of such events.
• Historical Parallels: I draw parallels between past events (e.g., the dot-com bubble, 9/11, Lehman Brothers) and potential future crises (e.g., China's housing bubble, tech stock plunges).
• Speculative Nature: Many of the predictions are speculative, and the author acknowledges that they may not come to pass. However, the exercise of considering these possibilities is valuable for risk management.
• AI. It will change the world for sure. Commercial real estate will suffer most, as many can work at home, and many jobs will be replaced by AI.

 

4. Strengths:

• Real-World Examples: The use of historical events (e.g., 9/11, Lehman Brothers) provides concrete examples of how black swan events can unfold and their impact on markets and society.
• Forward-Looking Analysis: The predictions for 2025 and beyond encourage readers to think critically about potential future risks and how to prepare for them.
• Personal Experience: My personal anecdotes (e.g., shifting investments during the dot-com bubble) add credibility and relatability to the analysis

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5. Weaknesses:

• Speculative Predictions: While the predictions are thought-provoking, they are highly speculative and lack concrete evidence or data to support them.
• Political Bias: This article includes some politically charged statements (e.g., regarding Trump and Musk), which may alienate some readers or detract from the objective analysis of black swan events.
• Lack of Solutions: While I identify potential risks, there is limited discussion of specific strategies or solutions to mitigate these risks beyond general advice to diversify.

 

 

Conclusion:

 

This article provides a compelling overview of past black swan events and offers a series of speculative predictions for future disruptions. My emphasis on diversification and preparedness is sound advice, though the speculative nature of the predictions should be taken with caution. This article serves as a useful reminder of the importance of being vigilant and adaptable in the face of uncertainty.