Passive investing and the "black swan"

Many of you may know the book “Black Swan” by Nassim Nicholas Taleb, which discusses drastic events and the impact they may have. I suggest that we talk about different really destructive scenarios and their consequences and our possibilities as passive investors to react to them. What are the realistic measures to be taken to be somewhat prepared to such things, like backing up your data, printing things out, etc.

To start with, let’s consider the following:

  1. There is a major war. Where is your money safer: with IB or with a Swiss broker? What actions can governments undertake with your money if they are really short of funds during the war?
  2. Major electric power cut or hacker attack. What happens to the records of your ownership? How can you prove to somebody that you own shares somewhere?

Great thread. These are two very good points that have been disturbing my peace of mind for some time.

As for other things, I used to have social-liberal political view, but over the years I grew more conservative. This is because I fear for a government that raises social care and taxes, in a vicious circle, eventually running out of money. I guess in Western Europe we can see some examples of countries overburdened with taxes. Even in Switzerland I spend more on taxes than on my own private expenses.

Diversification sounds like the way to go. Split your savings/investments across multiple institutions in multiple countries. Like for all diversification strategies there is an obvious cost and you need to figure out what trade off is acceptable to you.

The black swan I am least sure what to do about is when the global stock market will stop its seemingly never ending upward march. I kind of doubt it will happen within my lifetime but who knows.

Interesting thread indeed!
I wouldn’t like to sound like some wacky tin hat conspiracy theorist… But shit happens. Would you consider something like a stash f cash, gold or valuables in some crazy safe multiple locations?

Well if history is worth indicating something, when shit hits the fan gold is usually one of the first assets that governments forbid their citizen to own. The government usually buys back the gold to the citizens, at a not-so-advantageous conversion rate.

Or even just a major Krach like 1929. Sure, 20 years later the market would have recovered, bit who among us has 20 years to wait? When I look at current valuations, it is very difficult to tell myself “Oh, this is normal, stick to the plan and continue buying”. I mean, Facebook (and many FANG stocks) is currently selling at 16 times revenue (not earnings).

Just to put things in context, this is what Sun’s CEO was telling to shareholders after the dotcom bubble :

If i’d listen to my feelings, I’d be really keen on buying an out of the money put on FB as a cheap insurance against a major market crash…

FB is a software company which tend to have jawdropping margins, so high P/S is nothing out of the ordinary for them, most of that S translates directly into E. It’s still mightily expensive, not denying that, but it’s growing fast and mobile ads/payments market is still projected to grow bigger

Sun was more into hardware, so a more fair comparison would be to look at today’s comparable hardware stocks like DVMT or HPE they have far more modest margins and P/S as one would expect

I would argue most people under 50 are able to “wait” 20 years if needs be. Just get back to work (-:
Furthermore you don’t really have to “wait” until full recovery unless you invested everything precisely at the wrong time and have nothing more to invest until recovery.

If a 1929-style crash scares you, I think you should reconsider your investment strategy.

Cryptos might also be an interesting option for the paranoid as it is very easy to hide (and loose if you screw up), hell if you have very good memory you could even hide them in your brain (as far as I know governments can not really read minds at the moment XD and even torture is not really effective if they do not know what to ask for). It is volatile as hell though.

I have the impression that there are two broad categories of investors on this forum, when we look at their purposes :

  • The first one focuses only on building wealth, independently of the time horizon. It does not matter so much if a big setback delays the accumulation of their capital in a big way (major crash, etc), as long as they will be able to enjoy their money in the long term (let’s say 30 years from now) They do not particularly want to quit their job as much as they want to build financial security.
  • The other category has (very) early retirement as primary goal. For them, it does not matter how big is their stash as long as it allows them to have enough income without working. Therefore, a 20-years delay is not an option.

I clearly belong to the second category.

To put things in context, in this crash the main index went down from 300 to 41. If you have 1’000’000 CHF before the crash, you are left with 130’000 CHF, so that is a -87% drawdown. In other words, you are almost back to square one.
I’ll be honest and say that yes, such a crash scares me, and I would not stomach such a loss.
I’ll be as well very surprised if the majority of the forum would not have the same behavior (if i am mistaken, guys I admire your stoicism and your nerves).
We are not talking about the same crash as the burst of the dotcom or subprimes bubbles, where the S&P500 lost 50% and then recovered quite quickly. When thinking about a crash, most of us are young enough so that they only experienced the two last major crashes (2000 and 2008).
Well, a crash like 1929 wipes you out, and then prices stay low for a veeeeery long time. So yes, I am quite troubled about this crash as a Black Swan…


suppose you are scared this much of the black swan event, would it not be consistent to keep hands off stocks?


This blog post is good at explaining how I feel about this:

When you are accumulating you are going to recover faster than the market. When you are deaccumulating you are going to recover more slowly than the market. Your risk appetite/tolerance should be quite different depending in which phase you are in. However if you are deaccumulating and younger than 70 you are probably able to switch back to accumulating (or at least deaccumulating less quickly).

If you are planning to retire within a few years and truly are not able to delay a decade or two if needed and you have everything in stocks, yes, be scared of 87% crashes and get a more reasonable asset allocation now or earlier. Yes, that may mean you need to delay your retirement because your stash is not growing as fast as if it was 100% stocks.