COVID-19 Is Truly A Black Swan

According to Investopedia.com a black swan is an unpredictable event that is beyond what is normally expected of a situation and has potentially severe consequences.

When it comes to companies, Boeing comes to mind when I think about a black swan event. It’s been more than a year now that the Boeing 737 Max 8 had back to back (within five months of each other) crashes killing all on board. The first crash was a Lion Air Boeing 737 MAX 8 which plunged into the Java Sea shortly after taking off from Jakarta, killing all 189 people on board. The second crash was with Ethiopian Airlines killing 149 passengers and eight crew members on board shortly after takeoff.

But when it comes to black swan events that pertain to society / humanity, one that should be fresh in everyone’s head is COVID-19. According to John Hopkins University, worldwide cases have passed10 million, with deaths approaching 500,000. In the US alone, there were over 40,000 new cases on Saturday. But this is a truly worldwide phenomenon.
Portugal reported 457 new cases on Sunday, up from 323 on Saturday, the country now has a total to 41,646 people infected with COVID-19.

Tokyo saw an increase of 60 new cases today, another daily record after Japan lifted the state of emergency last month.
In Iran,10,500 people tested positive on Sunday its highest number of deaths in a single day since April 5th.

The US isn’t the only country with knucklehead people in authority type positions. In Switzerland, 300 people that went to a nightclub had to be quarantine after five people tested positive.

Nassim Nicholas Taleb is a essayist, scholar, mathematical statistician, and former option trader and risk analyst,[1] whose work concerns problems of randomness, probability, and uncertainty. He advocates what he calls a "black swan robust" society, meaning a society that can withstand difficult-to-predict events.

Taleb considers himself less a businessman than an epistemologist of randomness, and says that he used trading to attain independence and freedom from authority.[33] He was a pioneer of tail risk hedging (now sometimes called "black swan protection"),[34] which is intended to mitigate investors' exposure to extreme market moves.

Taleb reportedly became financially independent after the crash of 1987[21] and was successful during the Nasdaq dive in 2000[33] as well as the financial crisis that began in 2007.[9] Taleb claimed he retired from trading in 2004, and became a full-time author. His 2007 book The Black Swan has been described by The Sunday Times as one of the twelve most influential books since World War II.[2]

In the book, Taleb talks about a black swan being unpredictable and with massive adverse affects. Taleb talks about why people don’t pay much attention or prepare for black swans because humans are hardwired to learn specifics when they should be focused on generalities, meaning we focus on things that we know and don’t pay much attention to the things that we don’t know. He offers surprisingly simple tricks for dealing with black swans and benefiting from them.

Taleb was on CNBC this past Friday and said Taleb despite all the printing being down by the Feds, because interest rates are so low, the Feds may not have a lot of room to further ease the economic pain of COVID-19 and other problems that could arise amid this crisis. And thus, he suggested if anyone doesn’t have a tail hedge, they shouldn’t be in the stock market at this time due to all the uncertainty.

Now a hedge can take many forms, when I trade futures, my stop loss is my hedge. When put on option positions, my hedge is to get out at a 50% loss. Another hedge can be not risking anymore than 1% of your portfolio on any one trade. At the end of the day, it’s all about risk management and so, one should have hedges on in good times and bad times.

This post is my personal opinion. I’m not a financial advisor, this isn't financial advise. Do your own research before making investment decisions.

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