Skip to main content

Black Swan Theory

What is Black Swan Theory ?

The Black Swan Theory refers to a large-impact, tough-to-predict, and rare event beyond the realm of normal expectations. The term Black Swan comes from the assumption that ‘All swans are white’. In that context, a black swan was a metaphor for something that could not exist or not possible.

The “Black Swan” theory refers to events of large consequence and their dominant role in history. Black Swan events are a special category of what is called outliers.

black swan theory

What has Black Swan theory got to do with Indian Markets?

The Indian Stock Markets hit the upper circuit of 10/15/20% in 2009,  an event which did not happen before. This is a Black Swan Event, a rare event – no one expected.  This is a Black Swan for the bears since markets have hit lower circuit many times before, but not the upper circuit.

Identifying a Black Swan Event.

1. The event is a surprise.
2. The event has a major impact.
3. After the fact, the event is rationalized by hindsight, as if it had been expected.

As of today, global markets including the Dow Jones, S&P 500 and  Nifty 50,  hitting all-time highs, any event that could bring down the markets could be a black swan event. No one knows what it is, until it happens!

Another example of a Black Swan Event – Your stock broker gives a buy call and it works  🙂

Popular posts from this blog

NSE Trading Holidays 2024

 Trading holidays for the calendar year 2024. The National Stock Exchange of India (NSE) has notified trading holidays for the calendar year 2024 as below: Muhurat Trading:  Timings of Muhurat Trading shall be notified subsequently. 

Historical BSE Sensex returns - updated 2013

We have already seen the historical returns of the BSE Sensex, which indicated an average return of about 20%  per year, despite many yearly returns varying from -20% to +60%. The following table shows BSE Sensex historical data - open, close and the yearly returns of the sensex from 2000 to 2012. There are some interesting points to note from the above table. Post 2008 crash of about 50% and 2011 negative returns of 24%, markets have given positive returns of 81% and 25%. Also the average returns for the past years is about 20% despite the markets being down 24%. The lesson is pretty much clear - long term investing pays and one need not bother too much about the ups and downs of the markets. During the past few years, the returns from investing in individual stocks have been varied.  Despite markets being at 2 year highs, only a few stocks are at similar highs, while most of them are still languishing well below their historical highs and are down anywhere between 8