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Black Swan Theory

Sigma Investment Counselors

April 22, 2020

According to Wikipedia, a black swan event is a metaphor that describes an event that comes as a surprise, has a major effect, and is often inappropriately rationalized after the fact with the benefit of hindsight.  In other words, a black swan event is being blindsided, followed by finger pointing, based on 20/20 hindsight.

Black swan events, while relatively rare, tend to recur, although each is likely to be very different.  In recent history we have Pearl Harbor, 9-11, the financial crisis, and now, the Covid-19 pandemic.

Investors should be wary of those who claim to having foreseen a black swan event and provided an appropriate warning.  A black swan event is inherently an outlier, as it lies outside the realm of regular expectations, because nothing in the past can convincingly point to its possibility.  Never-the-less, in spite of its outlier status, human nature, and the pursuit of self aggrandizement, makes us concoct explanations after the fact.

All comments and suggestions are welcome.

Walter J. Kirchberger, CFA

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