So today we're going to talk about
what is a Black Swan event,
we're going to talk about some
examples of this, and
how can you protect yourself
and your portfolio from
such an event. So let's get started.
OK, let's first of all talk
about what is a
so-called Black Swan event.
You might have heard about this, you
might be afraid of it, or you
might have seen that on this channel
there are some comments where people
say, "Markus, what do you do
in the case of a Black Swan
event?" So let's first talk about
the definition and what a Black
Swan event is.
First of all, it is an outlier.
So it means that it is an event that
has never happened before
and will probably never,
ever happen again.
So it has to be an outlier.
What is the second thing that
qualifies a Black Swan event?
Well, it has an extreme
impact, right?
I mean, usually on the
economy and financial markets.
So this is the second criteria
of a Black Swan event.
And the third one is that
a Black Swan event is only
explainable after
the fact. So because it
is something that has never happened
before and will probably never
happen again, it is something that
nobody could
predict.
So let's talk about some examples.
So what are examples
of this Black Swan event?
Well, in order to do this, let's
actually talk about how this
all came about.
So there is this
gentleman, Nassim Nicholas
Taleb, and he wrote a book on
The Black Swan and the impact
of the highly improbable.
And in his book,
he used the following examples
as Black Swan events.
So one example would be
World War One.
So he says, "Wasn't predictable.
Nobody knew it and probably
could never happen again." Well,
until World War Two, anyhow.
Another Black Swan event where he
says, "That changed the world had an
extreme impact on the economy and
the financial markets." And again,
it does not only have to be
negative, it can be positive.
And this is where he says the
Internet was another Black
Swan event.
Number three, another example that
we are probably all familiar with
are the 9/11 terrorist
attacks, right?
I mean, the 9/11 terrorist attack,
this is something that nobody could
predict and that hopefully will
never, ever happen again.
Now, here is the interesting fact.
Again, we're talking about this book
that was published by Mr.
Taleb here on April
17, 2007,
right before the
financial crisis.
So naturally, the financial
crisis was added to
the list. And you see the
author could say, "See, I
told you though," now, Mr. Taleb,
the author, warned that the Black
Swan event or Black Swan events
in general are impossible to
predict due to the extreme
rarity, again, they have to be an
outlier, yet they
can have catastrophic
consequences.
And therefore, Mr. Taleb
says, "It is important for people
to always assume
that a Black Swan event is a
possibility, whatever it might be,
and try to plan accordingly.".
And so what
does this mean? Well, I
actually think this is a new
version, a much more educated
and smarter version about
the sky is falling and Chicken
Little or whatever.
But OK, in all seriousness
here.
So why should you care
about a Black Swan event?
Well, you see, since I'm a trader,
people ask me all the time, "How do
you protect yourself from a Black
Swan event" or "What do
you do in case of
a Black Swan event?" And this
is exactly what we are going to talk
about right now.
And I want to mention,
first of all, two important things.
Number one, there is a huge,
huge difference between a
trader like me and an investor.
An investor is just buying and
holding. As a trader
I watch the markets every day
and I always have
a stop loss in the market.
Now, the second important thing
is a Black Swan event
is not a one-day
event. Now, I want to take a look at
two very specific examples
here. I want to look at the 9/11
terrorist attack because this was
really coming out of the blue,
right? And I also want to look
at the coronavirus crisis,
because this is also classified
as a Black Swan event.
But let's talk about 9/11
first. So I actually
brought up a chart here of
9/11. This is the S&P 500.
And on this particular day, you see
where we have the blip here because
markets were halted, this was
September 11, 2001.
Now, a few things that you might
already notice here.
First of all, the markets
were already in a downtrend,
since June the markets were
going down. And you know me,
I like to look at indicators,
right? Because indicators give you
pretty early warning signs.
And these indicators that
I like to use are RSI,
MACD and Stochastics.
And as you can see, they were
already telling me that the market
is more likely to go down.
Now, does this mean that I could
have predicted September 11th?
Absolutely not.
This is not the claim that I'm
making. But I'm telling you that
as a trader at this
point, you would have already
positioned short, meaning that you
would try to take advantage of a
falling market here.
And this is the important thing, if
you don't know yet how to trade a
falling market, and how to make
money in a falling market, I did a
video on this, I'll link to it in
the description. Anyhow, so
this is what happened.
And then, yes, of course, for a few
days the markets were going down.
But as you can see, the markets
recovered a month
after. So on October 11th,
the markets were already there
where we were on September 11th.
So even though it was
a Black Swan event, as a trader,
as a trader it would not
have hit you that hard.
Now, let's talk about the second
event here.
Let's talk about the coronavirus.
So as you know, this here is the S&P
500 in
2020. 2020 starts here, as you can
see, and then we had
the crisis coming towards end of
February. And then between end of
February and end
of March the markets dropped
substantially, as you can see.
But you see, there were also
warning signs.
And this is where I can
actually say, you know what?
I did tell you.
Because on February 11th,
right here, I released a video.
Here's proof, February 11th,
2020, where I said, is it possible
that the stock market could crash
because of the coronavirus?
And I said, Absolutely, this is a
possibility.
So, I mean,
the Black Swan event that
we have was notary,
I mean, did I know that that
we would go to what point we
are going down? Of course not.
But that there's a very, very strong
likelihood, you see one, two,
three, four, five, six, seven days,
seven days before the crash happened
I already said, you know what,
this is what can happen.
But anyhow, I'm not here to
toot my own horn.
How do you protect your portfolio?
And this is where it is important.
You see, Black Swan events
might be horrible for investors.
What do I mean by investor?
A buy and hold investor.
But usually they're not horrible
for traders because
as a trader you're more agile.
You see, as an investor, you're like
the Titanic, you see the iceberg
and there's nothing you can do,
you're going to hit the iceberg.
As a trader like
me and like you are probably, right?
We are more nimble.
We are like a little speedboat that
is cruising around the Titanic here.
In fact, if you have been following
me here on YouTube, then you
know that I have almost
doubled an account in something
like 6 or 8 weeks during
the Black Swan event.
So because traders, like you
and I, know how
to read the early warning
signals and can
take advantage of it.
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