How will you manage a black swan event?

Great day for Pharma shopping :heart_eyes: :pill: :syringe:

:slight_smile: Yes I was tempted but I held back. Want to wait out some more. I feel export oriented have some more pain ahead with this quarter results as the rupee has strengthened. Waiting for it to play out.

Thanks for opening a thread on this. This is something I think and spend a lot of time on. However, I must say that we should not just talk about cyclical/bear market corrections as black swan events which are by definition much more impactful, something which most people have not even thought about. Some examples of real black swan events are: War with a nuclear attack on Delhi/Mumbai/Bangalore, World War 3, Aliens actually coming to conquer the Earth, big time Metroit attack leading to a severe impact on a major part of the World, Artificial intelligence taking over the human race etc., global warming gulping down several of the World’s major cities etc.

Other black swan events may be like 1929 depression where I think Dow Jones index took 25 years to recover (2009 was nothing in comparison to it in my opinion). I can feel sorry for anybody who was in a stock market career in those 25 years (as long as a full career).

Few points which are important during such real black swan events are as follows:

  1. Acceptance of Fate - this is something even Taleb has written about, while we haven’t really seen any major black swan event since last 40+ years. But when it will happen, anything can happen. Imagine a nuclear war between India and China for instance - in one go many of your loved ones may not be anymore, stock markets may not function for many months/years and any other thing may happen. In such a scenario, if one is alive, I think the journey first starts with acceptance of what has happened and not continuing to brood over the past life.

  2. Multiplicity of skills - If one survives, and especially for people who are full-time investors, stock markets may not be the place to be for many years (inadequate returns, lack of third party money to manage etc. etc.). Hence having a diversified skill set (say one is a great cook and good investor) will help you earn through this period. Also, psychology tells us that have multiple identities is a great way to cope up when one identity is gone or becomes useless. So in general, people having a wholesome life (a bit similar to the diversification of portfolio) will be able to go through this better than singularly focused stock market professionals.

  3. Avoidance of dollar cost averaging - Well, when a black swan event happens by definition there is no precedence so I would avoid entering stocks or investing in real estate until there are fairly sustainable signs of recovery and stability in the situation. I think dollar cost averaging may be a very dangerous strategy here. Even accounting wise, things like change in customer behaviour for multiple years can arise because of such events may be too hard to predict. For instance, Titan may start trading at 5 times trailing earnings but what if nobody is interested in buying Jewellery for the next 10 years because of the hardships they are undergoing (I am just giving a hypothetical example here).

  4. International diversification - I think some level of international asset diversification is a valid strategy but wouldn’t be suitable for most of the people with low net worth. Gold and cash are however great proxies. Yes, banks may even fail us and in fact, a lot of people do keep hordes of cash as they don’t trust banks fully.

  5. Staying in non-strategic locations - I do feel that in the case of nuclear attack, strategic locations and big cities are the most vulnerable from a missile or nuclear attack point of view. Ceteris Paribus, it makes sense to be slightly off such locations, if possible.

  6. Many others, this is being a subject of great interest to me. But enough discourse for now :slight_smile:

Overall, I feel the first step is to manage ourselves psychologically. Ofcourse, one must take steps for financial risk prevention as well, but with the knowledge that in case of a real black swan most of it may not be even valid.

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@8sarveshg @Yogesh_s @vasuadiga

Yes. I did think more after the comments on how to classify black swans and I concur with the opinions from you gentlemen and the opinion from @investr that my classification of swans and event based thinking needs some more knowledge which you guys have.

I am trying to rework my mental model of swan ideology :slight_smile:. It will be a work in progress.

Well said that corrections should not be covered under a swan. I just used to find it easier to plug it under a classification of known swans with the time frame unknown. The logic might be a bit here and there but it let’s me know what cycle I am in. I will try and build a more robust and less simplistic classification.

Let’s keep the thoughts flowing!

I have a feeling that if I spend a year or two more on VP, I might even become an investor :blush:

Hi @Yogesh_s Sir,

I did some reading on hedging with options and had a few questions:

From what I could pull up…

There are two types of Options.

  1. Stock Options - These are based on a American Model
  2. Index Options - These are based on a European Model

Difference:

American Options - Can be settled anytime once in the money.
European options - Based on the Index on the expiry date.

So, since you mentioned and I agree, stock specific is not advisable.

Insurance with a index option is advisable but that seems to settle only based on the index of expiry date. So if the Index fell like right now a little bit, there is no point where I can say, close this option except for waiting for the end of the month even if I am recovering 10% plus by exercising it.

Am I reading this right? Or making a mistake?

Also, a simple variation seems to be the horse race strategy, take a bet on a horse and a position on the favorite. Same way, if one took a deep out of money ( I don’t fully understand it’s meaning :slight_smile: ) for lets say index 9000 and then took a 10% of that value as upside insurance so if things moved against your thinking then the cost of the short is covered and if things move down then it is covering the position quite well. This is just my thinking, it is viable?

Best Regards.