What Is a “Black Swan” in the Financial Markets, and How Can You Benefit from It?

Experienced analysts and investors are capable of devising profitable strategies and providing fairly accurate forecasts of market developments. However, their efforts do not always yield success. Occasionally, unforeseen events occur on stock exchanges, much like in life, exerting significant influence and bringing either substantial losses or unexpected gains to trading participants. This is why investors must understand what a “black swan” event is in the financial markets and how to profit from it.

From this article you will learn:

1. Recognizing and leveraging “black swan” events in financial markets can lead to significant gains, but predicting them beforehand is inherently challenging.
2. Nassim Nicholas Taleb’s “barbell strategy” offers a framework for capitalizing on unpredictable market events by balancing investments between low-risk and high-risk assets.
3. Taleb’s own success, earning nearly $500 million in profit within a single day by implementing his strategy during the 2008 market crash, highlights the potential of this approach.

What is a Black Swan?

The term “black swan” (TBS) was introduced into common usage by Nassim Nicholas Taleb, who published the book “The Black Swan: The Impact of the Highly Improbable” in 2007. In it, he first used the expression “black swan events,” which readers began incorporating into everyday language.

Today, in both life and financial markets, “black swans” refer to events that are:

• Extremely difficult or even impossible to predict, even for experts.
• Characterized by significant impact and consequential outcomes.
• Retrospectively (when analyzing the history leading up to the event) have a rational explanation and visible causes, making the event appear entirely foreseeable from that perspective.

Examples of “black swan” events in financial markets are easy to find:

• The global economic crisis that began in 2008 with the collapse of Lehman Brothers, known as the “mortgage crisis,” turned out to be a true “black swan.” Virtually no expert could predict such a profound crisis in mortgage lending in the United States. The chain reaction, leading to a more than 50% decline in the stock market (according to the S&P 500 index), was unexpected for many. The consequences affected the entire global financial system and economy, with such a significant impact that the market only managed to return to pre-crisis levels in 2010-2011. However, many analysts post-factum argued that observing the real estate bubble and mortgage lending in the United States could have predicted the crisis.
• The COVID-19 pandemic also became a “black swan” in both daily life and market conditions. Its rapid development and high mortality rates were practically unpredictable. Therefore, the rupture of logistical chains and the economic crisis caused by the introduction of widespread lockdowns were impossible to forecast. The full recovery from the consequences has not been achieved to this day. Perhaps, specialists will later identify the signs that hinted at such a turn of events.

“Black swan” events do not always have negative consequences. An equally unexpected event may bring about a significant positive change in the situation. The author of the book asserts that the most significant discoveries that have influenced human life were not the results of meticulous planning and thorough research but true “black swans.”

Can You Profit from a “Black Swan”?

The very definition of such an event suggests that there is no answer to the question of how to recognize a “black swan” before it occurs. It is impossible to be prepared in advance for such an unpredictable situation, but it can certainly be leveraged. To do so, one must understand that in such circumstances, forecasts do not work, and those who can quickly adapt to changing circumstances come out on top.

If there is always a nonzero probability of a “black swan” event occurring, then it can be exploited. The author of the term and the book suggests applying the “barbell strategy” for this purpose. Nassim Nicholas Taleb outlined this strategy in his subsequent book, “Antifragile.”

The essence of the strategy is as follows: investors are encouraged to use opposite ends of the risk-return curve for investment, avoiding decisions that lie in the middle. This is akin to the placement of weights on a barbell, hence the name of the strategy.

In investment practice, this means the following:

• The majority of funds are invested in assets with low returns and extremely low levels of risk. These may include bank deposits, government bonds, and real estate properties. Their reliability ensures that even in the event of a “black swan,” losses do not exceed an acceptable level.
• The remaining funds are invested in instruments with a high level of risk but also returns in the hundreds or thousands of percent. A prime example of such an investment instrument is an option deeply “out of the money,” which yields significant returns in the event of a decline in the underlying asset. Since the amount invested in such hopeless ventures is small, losses from them are easily offset by income from the main investments. However, in the event of a “black swan,” the profit can be substantial.

Implementing this strategy brought Taleb a profit of around $500 million. Moreover, 97% of this amount was earned within a single day. Taleb, confident in the instability of the economic situation that emerged in 2007-2008, invested money in put options for almost two years. Most of the deals resulted in losses. With a risk-return ratio of about 1:10000, such losses were not particularly sensitive. At least Taleb did not lose his entire account. However, the market crash in 2008 made him wealthy in literally one day.

An investor is perfectly capable of devising dozens of applications for the “barbell strategy” that can yield extraordinary results when a “black swan” event occurs. For example:

• Invest 99% of funds in an extremely conservative portfolio. Use the remaining 1% for trading on the futures market.
• Use almost all capital to purchase reliable stocks and bonds, and open a margin short position with a large leverage on the remainder.

The strategy works not only in the market but also in everyday life. An example is time allocation, where a person spends the majority (say, 75%) of their time in an official workplace and allocates 25% to trading in financial markets.

Thus, a “black swan” is an unpredictable significant event that can bring not only negative consequences. With the right approach to asset allocation (whether it’s investment capital or work time), the result can be substantial gains — such as investment income, fame, and so on.