Did We Just See a Red Swan?

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Reddit, GameStop, Stimulus, and Two Things to Do If You Want to Survive and Thrive in the Age of the Black Swan

Photo by Yuvraj Yadav on Unsplash

Everything was obvious to Wall Street investors:

Brick-and-mortar businesses are failing. GameStop sells a product that is cheaper and better to buy online. GameStop is going to fail. Let’s short the crap out of its stock so we make a killing when GameStop files bankruptcy.

There were supposedly more short shares than actual shares.

Enter r/Wallstreetbets (queue Seven Nation Army), armed with a lot of free time and stimulus checks.

They decided they like GameStop . . . or wanted to stick it to the hedge fund managers . . . or wanted to make a ton of money by sending the stock soaring and forcing the hedge fund managers to cover, thereby sending the stock yet higher.

Or maybe all three.

Regardless, they won. A bunch of ordinary kids with small amounts of money beat the living hell out of the hedge funds.

The carnage was great. Heck, the carnage is still taking place. No one knows what’s going to happen when the NASDAQ sounds the trading bell Monday morning.

It’s been a fascinating and fun ride.

It’s been an unprecedented ride.

And I think it was a Black Swan event, as defined by Nassim Taleb in his 2007 bestseller.

The Black Swan

In order for something to be a Black Swan, it needs three things:

First, it is an outlier, as it lies outside the realm of regular expectations, because nothing in the past can convincingly point to its possibility. Second, it carries an extreme impact. Third, in spite of its outlier status, human nature makes us concoct explanations for its occurrence after the fact, making it explainable and predictable.

Clearly, the first two things are present in the Reddit event. Now we’re just waiting to see if people later claim it was explainable and predictable.

But for our purposes — figuring out how to deal with Black Swan-type events — the first two are all that matters. How historians deal with it, that’s not really our concern if we want to survive in this world.

The Black Swan Age

Because here’s the thing: We are living in the Age of the Black Swan.

Cheap travel and loosening borders have compacted the world, making everyone else’s problems everyone else’s problems. COVID is the most obvious example, but there are others, such as global warming and Socialist schemes that are sending southern peoples migrating north.

There are trillions of dollars of stimulus sloshing around the system. I remember back in 2008–2009, when the feds unleashed huge stimulus, that commentators said there are no economic models to predict what such a massive issuance of dollars would mean for the economy.

Well, I don’t know what 2021 models can tell us, but we’re dwarfing 2008–2009 right now. And even if we have models, we know the nature of Black Swan events means models are worthless.

All we can really predict with a fair amount of certainty is that trillions of new dollars open the cage on Black Swans. A few are going to fly out and whack us in the head, just ask the hedge fund managers who were whacked in the head by a Black Swan fed with $600 stimulus checks.

What to do?

Okay, so we are apparently in the Age of the Black Swan.

What can you do?

Here’s my advice, but mind you: This advice comes from years of reading Nassim Taleb. I’m neither a financial adviser nor an investment guru. Heck, I’m not even that smart. I’ve just been reading and cogitating on Black Swans for the past 12 years.

You should follow two rules:

Rule Number One: Survive.

The traders who do well, says Taleb, aren’t the ones who make sudden killings. They’re the ones who follow a steady pattern of intelligent (if commonplace for Wall Street) investments, but they make sure they don’t get eliminated by a Black Swan event.

You need to do the same thing, especially if you have dependents.

To do this, get your debt load under control. Heck, eliminate it, if possible.

Look at the GameStop shorters. They were destroyed because of debt. They borrowed shares of GameStop stock and promised to return the stock at a later date. When that later date came, they had to pay huge sums to pay it back. Don’t let that be you.

Make sure you have a year’s worth of living expenses saved up in safe and liquid investments (good luck figuring out what those investments are . . . like I said, I’m not an investment adviser).

Stock up on some basic foodstuffs in case things get real bad. I’m not a prepper, incidentally, but I do keep a few weeks of food on hand at all times. My motto, “I just don’t want to be the first guy on the block to go down.”

Learn to hunt and secure hunting land. Start a vegetable garden. Stockpile seeds and jars. Etc.

Rule Number Two: Position Yourself

Ask yourself: If a Black Swan shows up, how can I best profit?

You need to figure this one out for yourself, but I’d suggest that it can take the form of placing random investments in odd stuff. Gold mining stocks, for instance. Dogecoin and Bitcoin. Maybe buy a “short fund” that goes up when the market goes down.

But when doing this, keep in mind Rule Number One: Survive. If you overload into those odd investments, you may not survive.

I loaded into mining stocks about ten years, getting ready for a Black Swan event. I took an absolute beating, some of my bets losing 90% of their value.

But, being very conservative (okay, cowardly) by nature, I first made sure Rule Number One was firmly in place. I had a stockpile of cash, low debt, and a good job. I was able to hold onto those horrible stocks, and now they’ve roared back, some are actually “in the black” for me, with the future looking bright.

The Rules Combined

The two rules above give rise to what Taleb calls “barbell” investing. You keep a lot of your assets in safe investments (Rule One . . . the middle part of the barbell), then you load up the ends with outrageous investments (Rule Two . . . the ends of the barbell, where the weight is).

It’s the way I invest and live.

It doesn’t always work out well, but I am surviving and, as of right now, fairly well thriving.

But I’m not getting cocky (make that Rule Number Three: don’t get complacent). The Black Swans respect no man and no investing strategy. It wouldn’t shock me if a Black Swan comes along that breaks that barbell somehow.

We all just need to do the best we can.