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Investment strategy

The corona pandemic: a white swan, not a black swan

A microscopic virus has brought the world to its knees. Such unexpected events often signal their arrival far in advance. Drawing the right conclusions from that is important.

Marc Lustenberger, Gastautor
Reading time
5 minutes
Black swan

It was the perfect storm - and practically nobody saw it coming. It took only a few weeks for this microscopic organism to conquer the whole world and fill billions of people with angst and dread. At the same time, coronavirus infected the economic system, forcing workers and consumers into quarantine, paralyzing factories and markets, and shaking stock exchanges worldwide.

Extremely unlikely - extreme consequences

In the Anglo-Saxon world, such an event is called a black swan. Before the English discovered Australia, they were of the firm conviction that all swans were white. Since then, "black swan" has served as a metaphor for extremely unlikely events. Not only are they hardly foreseeable, they also have extreme consequences. Black swans have the potential to trigger political upheavals, economic crises, health epidemics and environmental disasters. With coronavirus and its repercussions, we are all currently experiencing first-hand what happens when a pandemic and an economic crisis descend on the entire world almost simultaneously. What conclusions should investors draw from this? They should read a book. Since the collapse of Lehman Brothers in 2008, Nassim Nicholas Taleb's book "The Black Swan: The Impact of the Highly Improbable", has been quoted every time a crisis arises.

Deceptive linearity

The American financial mathematician and former Wall Street professional is a lateral thinker who meticulously analyzes the weaknesses of our modern world. The more interconnected our economy and society, the more serious the effects of black swans, he writes. And he says that people repeatedly stumble over the deceptive linearity of events. If something has worked 1000 times in a similar way, we blindly assumed that this will also be the case for the 1001st time. Taleb uses the example of a turkey to describe this. The turkey is fed and cared for by humans all of its life. He is convinced right up to the end that he is living in a fantastic world. But one morning, one of these humans breaks his neck - because Thanksgiving is just around the corner.

The polemical Nassim Nicholas Taleb has not only written numerous successful books in his life. As a trader on Wall Street and later as an advisor to a hedge fund, he has made a lot of money with his unconventional thinking (see box). As an investor, he focuses on events considered unlikely, such as bank failures and price losses across all asset classes. With so-called black swan funds, he has created his own investment category. Critics accuse him of personally profiting from the suffering of others through his financial bets. He is considered to be sensitive about his theses being called into question and thus rubs academia the wrong way.

White or black?

White swan and black swan
It's a white swan

However, what Taleb wrote about coronavirus in an essay in the Neue Zürcher Zeitung is worth considering: "A global pandemic is clearly a white swan - an event that is certain to occur at some point. Such pandemics are inevitable, they come as a result of the structure of the modern world; and their economic consequences will be even more serious as a result of increasing interconnectedness and exaggerated optimization."

Pandemics have occurred again and again throughout human history, which is why it is white swans that need to be prepared for. In fact, Taleb and a few other investors foresaw such a virus as a possible scenario and bet on it. With SARS, Ebola and the influenza viruses, there have been several examples in recent years that have highlighted the exponential spread of such a pandemic. The government of Singapore evidently read his books, and called Taleb in as an advisor in 2010. As a result of this collaboration, Singapore began to prepare for a possible pandemic with a detailed plan. The city state therefore made it through the crisis well, managing to contain the pandemic early on and keeping the mortality rate very low.

Opportunities in a crisis

So, what can we learn from Nassim Nicolas Taleb? He believes in differentiated thinking: "Every crisis, no matter how big, also gives rise to opportunities." In his book, he distinguishes between negative and positive black swans. Negative is the term he uses to describe those unforeseeable changes that have a critical or even existentially threatening effect on an organization or a nation. Conversely, positive black swans foster development. For Taleb, this includes the discovery of America or the development of penicillin. An example in the current crisis would be the much faster than expected development of a vaccine against corona viruses. From an investor's point of view, it is important to regularly question strategies and never blindly follow the herd. It also remains important to diversify broadly and to have reserves for times of crisis.

The fact that humans do not recognize black swans at all or only much too late is probably due to human nature. Only in retrospect do we find wordy explanations for their emergence. But this does not mean that you can't prepare yourself for them. Taleb calls black swans that can be expected to a certain degree, grey swans. The author considers "Earthquakes, blockbuster books and stock market crashes," to be examples of grey swans. These can be identified to a certain degree, although never fully grasped. How do you recognize grey swans? "Distrust dogmas and try to think outside of the usual concepts," writes Taleb. 

The most important example of such a grey swan is climate change. It has been pushed to the edge of public consciousness by coronavirus. However, as soon as the next drought, flood or a hot summer occurs, it will come back into focus. The effects of climate change are still uncertain, but the probability that the consequences will be serious is very high. Climate change, with all its repercussions, threatens to revolutionize the world even more radically than the microscopic coronavirus is doing at the moment.

Black swan funds among the winners in the crisis

Black swan funds are a category that first came to public attention during the financial crisis with the founding of Universa by Mark Spitznagel. Universa Investments is a hedge fund that invests along the conviction that certain extreme events will occur, and is advised by Nassim Nicholas Taleb. Its strategy is to buy call and put options on a stock index simultaneously, wait for years and accept losses. If the index moves massively downwards one day, the profits from the calls or puts will eventually flood into your coffers. With this strategy, Universa has been one of the big winners in the current crisis. According to reports in the US media, the fund achieved an incredible return of 4144 percent in the first quarter of 2020. But because such events only occur every few years, the fund’s performance is below average 99 percent of the time.

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