Black Swans and Investing: The Invisible Things Might Change the Game

Over the past few years, investors have been talking extensively about “unpredictable events,” whether it’s an economic recession, market turbulence, or even a global pandemic that changes the world. All of these are related to the concept known as the Black Swan, introduced by Nassim Nicholas Taleb, an American-Lebanese author, which has captured the interest of the general public.

However, in reality, most of our disciples still do not deeply understand what a Black Swan is, how it differs from general risks, and most importantly, how we can prepare ourselves for its arrival.

Why is it called a “Black Swan,” and what does it really mean?

Since ancient Roman times, humans believed that swans were only white. This belief persisted until 1697, when Willem de Vlamingh, a Dutch ship captain, discovered black swans in Australia. That moment marked a significant turning point for the term “Black Swan,” which no longer implied something nonexistent but rather referred to something we thought impossible but turned out to be true.

In the context of finance, a “Black Swan” is an event characterized by three features, as explained by Nassim Nicholas Taleb in his book “The Black Swan: The Impact of the Highly Improbable” in 2007:

1. Beyond expectations – No historical data suggests it will happen.
2. Creates massive impact – Its influence is not minor but affects many aspects of life.
3. Humans explain it after the fact – After the event occurs, people tend to find reasons to explain why it happened.

Real examples of Black Swans that changed financial markets

( COVID-19: An event many governments were unprepared for

In December 2019, the COVID-19 pandemic started in China. Within a few months, the entire world entered an unprecedented lockdown in modern history. The private sector economy shut down by up to 90%. People lost jobs, consumption contracted, and demand for goods plummeted. In the US, deflation became a reality driven by economic fears, following soaring unemployment and consumers saving more.

For the Thai economy, this crisis affected exports and tourism, which are the country’s main pillars.

) Russia-Ukraine War: Rising fuel prices and soaring inflation

In the first half of 2022, war erupted in Europe. Its impact was not limited to the battlefield but affected energy prices and commodities worldwide. The US dollar appreciated to an all-time high, while other currencies, including the Thai baht, depreciated.

Thailand was directly affected through rising oil prices, increasing transportation costs, and soaring chemical fertilizer prices due to higher natural gas costs. Investors and the economy had to reassess risks anew.

Thailand’s foreign exchange reserves decline: A warning sign

Thailand’s reserves at the end of 2021 were about 10 trillion baht. Currently, they have decreased to approximately 8.8 trillion baht, a drop of about 13 billion USD. The key factors behind this decline include low investment returns, asset revaluation losses, and the Bank of Thailand’s currency policy. When the dollar strengthens, converting assets into dollars makes reserves appear to decrease.

This has led many to worry that Thailand might face a TMT-like crisis again.

Thailand’s economy in 2023: Positive signs and upside potential

Data from the Thailand Development Research Institute shows that Thailand’s economy in Q4 2022 grew only 1.4% year-on-year, slowing down from 4.6% in Q3.

The main components of this slowdown are a 7.5% decrease in exports and an 8.0% drop in government consumption. However, tourism and private consumption remain supportive.

For 2023, national organizations forecast economic growth of 2.7-3.7%, supported by a recovery in tourism. Private consumption is expected to grow by 3.2%, while private and public investments are projected at 2.1% and 2.7%, respectively.

Overall inflation is expected to be in the range of 2.5-3.5%, down from 6.1% in 2022.

5 Black Swan events that could happen in 2023

( 1. Global recession

Many global organizations assess that 2023 has a high chance of experiencing a severe slowdown. The economies of the US, many European countries, and emerging markets are facing their own crises. These issues stem from the residual effects of the Russia-Ukraine war, continuous interest rate hikes by major central banks, and slowing economic growth.

) 2. Stock market volatility and interest rate adjustments

In 2023, the Thai stock market has many opportunities, especially in tourism and retail sectors, which are still recovering from COVID-19. However, if interest rates, which are expected to rise further, increase, they could pressure high P/E stocks.

3. Cryptocurrency market swings

The crypto market is highly risky. History shows it can crash suddenly. On May 19, 2021, Bitcoin dropped from $65,000 to $30,000, marking a Black Swan event that could recur. Institutional sell-offs or false news from unforeseen events could trigger massive sell-offs.

4. Gold prices surging

The trend for 2023 suggests gold prices might rise. Supporting figures include the expected recovery of China and India’s economies, which together account for about 50% of global gold demand. Especially as China relaxes its Zero-COVID policy and accelerates economic stimulus.

Gold prices are expected to approach $1,900 per ounce, a level previously touched but not sustained. If it can hold steady, it might break through to $2,000 per ounce.

( 5. Risks from dollar depreciation

After US inflation eased more than expected, the dollar was sold off early this year. The British pound appreciated, marking the first decline of the dollar in six quarters. However, the UK and many other countries plan to continue raising interest rates, which could further pressure their economies.

Too late to prepare: How to get ready for the next Black Swan

It’s impossible to predict when or what the next Black Swan will be, but investors can prepare.

Accept the inevitability of the unexpected

Ignoring Black Swan events is like trying to prevent rain by throwing balls into the sky. Financial markets are constantly changing, and unpredictable events are part of the game. Don’t stress over them but prepare.

Leverage opportunities

When stock prices plunge during a crisis, cash-rich investors who believe in the fundamentals may find buying opportunities at attractive prices. Over 5-10 years, the value often recovers, sometimes exceeding previous highs.

Diversify your portfolio as a shield

If you concentrate holdings in just one asset class, a Black Swan event could cause severe damage. Holding stocks, bonds, gold, and real estate in appropriate proportions can reduce impact.

Have a backup plan

Long-term investing is often the most resilient approach. Sometimes, Black Swans reduce profits temporarily, but markets tend to recover and surpass previous peaks.

Use hedging instruments

Some investors use options or futures to hedge against large events. These instruments have costs but can limit losses in adverse situations.

Summary: What you don’t see may still happen

All the events mentioned—from COVID-19 and the Russia-Ukraine war to crypto market risks—are Black Swans that appear when we are unprepared.

However, with mindfulness, rationality, challenging our own perspectives and assumptions, and having contingency plans, we can turn losses into wins.

A Black Swan can serve as a wake-up call, not a sign of inevitable defeat. Understanding its nature and accepting uncertainty are the foundations of mindful investing.