Black Swan Positive

I stumbled across a +45 minute podcast from the Royal Society of Arts yesterday which is highly entertaining, in a quantitative sort of way. The speaker that night was none other than Nassim Taleb, author of Fooled by Randomness and The Black Swan. It's a fantastic listen to, especially when he talks about something called "Black Swan positive."

Black Swan Events (BSE) are outlier events, events that you never dreamed of occurring but they do. Sometimes these are negative events where the outcome is very bad for you. An example that comes to mind is Enron, no one saw it coming, and neither did Arthur Anderson. I bet the Anderson people never dreamed that this single event, from a single client, could cause them to go out of business.

Wikipedia defines Black Swan Events as:

The disproportionate role of high-profile, hard-to-predict, and rare events that are beyond the realm of normal expectations in history, science, finance, and technology.

The non-computability of the probability of consequential rare events using scientific methods (owing to the very nature of small probabilities).

The psychological biases that blind people, both individually and collectively, to uncertainty and to the substantial role of rare events in historical affairs.

What about COVID? Was that a Black Swan Event? According to Wikipedia, it wasn't. Why? Because we were watching it unfold in real time and our governmental policy was in disarray.

Do Black Swan Events need to negative? No, they can be positive too. Those are the more interesting BSEs because they are the eureka-type events that transform our daily lives into something better. An example that comes to mind is the discovery of penicillin, which was completely by accident!

According to Nassim, you should invest in companies that are BS-positive because it limits your downside risk and leverages your upside. That's great advice but the trick is finding these companies and then paying a cheap price for them!