What is a Black Swan?

A ‘black swan’ is a term you probably heard more in 2020 than in any other year in recent memory. …

Black swan figurine on top of pile of coins started to topple over
Image source: Getty Images

A ‘black swan’ is a term you probably heard more in 2020 than in any other year in recent memory. Despite its avian name, a black swan has absolutely nothing to do with swans, any other kind of bird, or ballet. So, if you’re an avid birdwatcher who has found themselves at this page, I’m sorry friend, you’re in the wrong place!

So, what is a black swan, and more importantly, what does it have to do with investing?

What is meant by a ‘black swan’?

In the world of investing, the term ‘black swan’ is now used to describe any market-moving event that no one saw coming. A perfect example of this is the coronavirus pandemic, which profoundly shaped the investing landscape of 2020, despite only coming onto the radar of ordinary investors in late 2019. 

Before 2020, investors hadn’t really seen a massive black swan for a number of years. Sure, you could call unexpected events of smaller significance black swans, such as the election of President Trump, or the affirmative Brexit vote in 2016, or perhaps the onset of the Global Financial Crisis in 2008. But the upper limits of the term only apply to a few calamitous events, such as the pandemic and the 9/11 attacks in 2001.

What are some examples of a black swan?

Despite the birdwatching disclaimer earlier, this term does indeed have an ornithological origin. Prior to Captain Cook’s arrival in Australia, a black swan was a term used throughout the British Empire to describe an impossible scenario. See, back then, the only swans around were white, so a black swan was an easily imagined metaphor for anything deemed impossible to exist.

But that all changed when white settlers arrived in Australia and discovered there was, indeed, such a thing as a black swan. Thus, the term evolved to mean a rare but significant event that doesn’t seem possible or likely to occur, until it does.

How can investors prepare for a black swan?

By their very nature, black swan events are impossible to prepare for. Yet they are an occurrence that all investors should be ready to accept. We won’t know when, where, why or how, but a black swan will hit us again at some point.

So, what can investors do? 

Well, it’s worth asking yourself questions like: ‘What kind of event can derail the companies in my portfolio?’, as well as, ‘Are my businesses strong enough to withstand anything the world can throw at them?’.

There are limits to this, of course. No one can predict the future. But there’s a reason why some companies are thriving during the pandemic, while others struggle. Some companies sell products that people simply can’t live without, while others don’t. 

While we’ve seen companies providing air travel, cruises and car rentals struggle enormously in the Brave New World that the pandemic has created, it’s hardly quenched the globe’s desire for Coca-Cola, or Apple products, for example. In the immediate aftermath of COVID-19, people were using social media, YouTube and Google search more than ever.

Supermarket giants such as Coles Group Ltd (ASX: COL) were flat strap. And the accelerator hit the floor in terms of the transition to a cashless society, benefiting companies like PayPal (NASDAQ: PYPL) and Afterpay Ltd (ASX: APT). Even at the peak of national coronavirus lockdowns, we still needed the simple household staples like the laundry powder, deodorant, shampoo and bleach that Unilever (NYSE: UL) manufactures.

So, while it’s impossible to predict or prepare for a black swan, you can take steps to minimise the risks that such an event might pose to your own portfolio. If your company or companies have a powerful brand, a loyal customer base, or they make goods and services people can’t live without, they have a head start against a black swan.

Asking these questions of your own portfolio holdings can help assuage any concerns you may have about a future black swan event. But, as is the very nature of the black swan, we can never be completely safe. It’s just one of those things in investing that we all have to accept is possible (or inevitable).

This article was last updated on 28 October 2021. Motley Fool contributor Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of and has recommended AFTERPAY T FPO and PayPal Holdings. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has recommended Unilever and has recommended the following options: long January 2022 $75 calls on PayPal Holdings. The Motley Fool Australia owns shares of and has recommended AFTERPAY T FPO and COLESGROUP DEF SET. The Motley Fool Australia has recommended PayPal Holdings. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.