The Black Code

Sounds fascinating, isn’t it? But why write on a color, when it depicts darkness, cruelty, blindfolded, and so on? Believe me, it has a lot of significance in finance. How do you say?

We all must have heard of Black Swan events. In a nutshell, black swan events refer to those events which are unexpected to occur, something which disrupts the ecosystem by the element of surprise. It was first coined by Nassim Nicholas Taleb, a prominent economist, professor, and writer. Earlier, he had introduced the term to cover financial markets. But later on, he widened the scope to include historical, scientific, and other events. He has also written a book on it titled “Black Swan: The Impact of the highly improbable.”

Let us look at some of the black swan events which shook the economy in one way or the other:

1. Black Tuesday: It was observed on 29th October 1929, when there was a precipitous drop in the value of the Dow Jones Industrial Average (DJIA). Major reasons behind it were excessive use of leverage for buying stocks, global protectionist policies (huge rise in tariff rates), slowing economic growth, etc. It also marked the beginning of the great depression.

2. Dotcom Crash: Lasted between 1998 and 2000, it was a result of collective action of excessive cash burn by the tech companies, fad-based investing rather than value investing, and sheer speculation. Very few companies managed to maintain their value during the crash.

3. Sub-Prime Crisis: Increase in high–risk mortgages that went into default by the borrowers who were not able to repay the loans, leading to collateral damage, first, to the banks, and eventually to the whole economy, leading to one of the worst recessions the world has ever seen.

4. COVID-19: Started between late 2019 and early 2020, it has been one of the worst viruses the world has ever seen, restricting people to sitting back at their homes, making the markets go down, leading to a sudden fall in the overall economic activity.

One common thing between the above events was uncertainty. It is such a thing that can either make you tremendously rich or can disrupt your wealth overnight. What we can understand from these events is that life can throw some tough situations at us, so we should be prepared for such contingencies by investing in value–driven avenues that can give us decent to good returns over time.