Idiotopedia: Contraception Theory (aka. Conspiracy, Not A Black Swan Story)

After observing the current capital market situation, I was intrigued to write this article. I remember a couple of years ago, I read a book by Nassim Nicholas Taleb that discussed the concept of the black swan, which he claims is the impact of highly improbable events. These days, the world is constantly affected by unpredictable and rare occurrences, and the implications of these events for investors and markets are compelling. In this article, I don't want to review his book; I want to share a bit of my thought about the current situation - but again, this is a personal observation, and there are no negative preferences or harmful recommendations for any individual or organization's movement, therefore think before act.

As mentioned in that book, the black swan is unusual and unpredictable. It can have severe consequences and is characterized by its rare and significant impact. It is also widely believed that these incidents were evident in hindsight. However, according to Nassim, standard tools for prediction and probability do not work for infrequent events. Instead, they rely on past observations and a large population to conclude. Therefore, using statistics to predict black swans does not help us identify them and could make us more vulnerable.

Let me share sample cases; well, actually, everyone can google these stories. The dot-com bubble was created from (around) 1995 to 2001. It was caused by the rise of the stocks of Internet companies and the emergence of new ones; well, I hope this cycle is not happening again due to the hype of e-commerce IPO companies these days. At that time, the value of these companies' shares increased. However, many of these new business models failed, leading to bankruptcies. And following that burst, the black swans are often blamed for historical events. For instance, the 1997–1998 Asian financial crisis resulted in the dropping exchange rates of various Southeast Asian currencies. It also led to several banks' failure, primarily due to foreign lending, supported by the US Federal Reserve's monetary policy and favorable local currency terms. As a result, their economies were heavily over-extended, which led to a collapse and large deviations.

Another example case of a black swan is in the stock market. In 2008, the economic recession resulted in the loss of several hundred thousand jobs, and one of the leading investment banks, Lehman Brothers, collapsed. But that happened only in the USA; meanwhile, the global financial crisis resulted in a loss of around $10 trillion in stock market value. Again, however, experts noted that the causes of the problem could have been seen many years in advance (who knows?)

And around 2 years ago, sometime in January 2020, Great Britain officially exited the European Union. Although the country's exit impacted stock prices and the economy, its effects are still to be seen. The factors affecting the country's rights are the government's hostile attitude toward democracy—the media's rejection of human rights, and the climate of intolerance. But lately, we heard that (hopefully) there will be a new change of movement from the new government. Meanwhile, I sit back and relax with my bee, watching the Premier League.

Many people believe that the coronavirus is another black swan' case because it shows how weak the global states are and how vulnerable they are to external threats. The WHO also issued contradictory and belated recommendations. The pandemic over the past few years was unexpected for the global community. However, it resulted in global consequences. The rise of the global pandemic in 2020 is a modern example of what's known as the black swan in the economy. In some countries, during the pandemic lockdown, the collapse of the stock markets caused by the pandemic could be regarded as catastrophic.

Overall, the global markets also went through their peak.?Thus, from my point of view, we all want to know what the future will bring, but we can't. We can only model and predict certain things, and the black swan events can create practical and psychological problems. And social media is a way of communication that can be a double-edged sword for everyone. Let's say that even if I can predict the future price of oil and election results, other factors, such as natural disasters or war, can affect the stock market and my plans. Moreover, these kinds of events can happen at any time to everyone. A few recent conflicts are examples of how wars can go wrong; yeah, the drama between Russia vs. Ukraine, or even the country territory debate between Indonesia vs. Australia... well??

These black swans' theories are considered to be incredibly difficult to predict. This makes it incredibly difficult to create an effective investing strategy. When they become predictable, they tend to become white swans. Here are a few ways that I have observed to avoid these birds.

• When the Black Swan possibility is multi-dimensional and distinct, it is better to hold puts instead of taking a risk with open losses. This is because we can benefit from the covered option cost if the black swan is positive. On the other hand, if it is negative, we can lose money with the put option.
• Our asset allocation plan should automatically switch to a more balanced mix based on factors such as interest rate expectations, valuations, and inflation. This will allow us to avoid getting caught holding on to overvalued assets.

This theory is known to occur in different markets at regular intervals. Therefore, it is always better to be on the side of caution when it comes to investing.

I have read an article on the internet that mentioned that complex models might be pointless. It stated that people tend to avoid using many of these decisions due to how hard it is to justify them. Instead, they prefer to make safer, conservative decisions. This suggests that fund managers may not recommend or make risky investments because it is easier to go with the flow.

Sample in sustainability investing cases; waste management startups' usual waste and recycling processes are still the most appropriate even when creativity and originality are involved. Although complex models such as Pareto efficiency(1) can be useful, they are not as effective as intuition when making decisions. Information is expensive and slow, and getting it can be challenging. However, it can be managed and controlled in investing. Ignoring the possibility of black swan events is risky, as it can lead to financial disaster. To avoid this, many people and firms try to predict them and then plan their financial future without knowing what will happen.

I am quoting Harry Markowitz(2), Nobel Prize holder, for his work on diversification. In particular, he is regarded for developing the modern portfolio theory. Markowitz's approach involves collecting data over 500 years, allowing one to implement his ideas. Well, the asset allocation models used during the 2008 and 2009 crises failed miserably. Although they can still diversify, they cannot fully integrate the black swan events into their models.

Then I can say we should avoid investing in a "nuclear power plant" with an incentive bonus. Instead, focus on simply managing our financial complexity. One way to do this is by investing in a mixed fund. Although these differ in quality, they can complement one another. One of the most important factors that we should avoid when it comes to investing is hindsight bias. It can be misleading to assume that the past will automatically predict the future. Instead, be realistic and take into account the world's unpredictable nature. Please don't put too much faith in the forecasts we can get from a computer (theoretically).

Although a natural event might cause a black swan, its unpredictable nature makes it different from white swans. People tend to pay little attention to the things that happen before a catastrophe occurs.

As I have mentioned above, below are the main blunders that prevent us from expecting the appearance of "black swans" in time:

• The belief that people have more trust in their surroundings and opinions is known as the bubble effect. This is because people tend to rely on the information presented to them by those they consider to be authority figures.
• In real life, the use of mathematical methods can get excessive. For instance, game theory can be used to predict the likelihood of a specific outcome. However, it is very complex in practice and should be avoided.
• A retrospective analysis is a type of analysis that aims to predict future events based on past experiences. Unfortunately, this approach tends to make people believe they have all the necessary knowledge to make projections.

Thus, if we're looking for signs of approaching disasters, the bad news is that we're likely to ignore them. However, there are so many possibilities that we should pay attention to. As we know, black swans are unpredictable creatures that can affect various areas. However, there are ways to protect ourselves from them.

The best way to reduce the impact of the black swan is not to try to predict its behavior. Instead, try to develop sustainable plans and understand their inevitability. For example, in response to the financial crisis that occurred in 2008, many banks conducted stress tests to see if they could survive another crisis. Some central banks also participated in the exercise. However, like in other areas, the black swan can affect trading without warning. Therefore, investors must take the necessary steps to protect their assets. There are several approaches:

• After studying the history of market movements, it's clear that bad events happen in a regular cycle. So accidents shouldn't be considered a surprise.
• These black swans provide investors with numerous opportunities. It is essential to consider investing in sustainable companies when the stock market drops and the value of their assets declines. These businesses will be able to bounce back and continue to grow.
• This is very important for all investors, as it can help them avoid getting affected by a black swan possibility. Having only one asset in our portfolio can be very risky. To minimize the impact of a black swan, we should regularly distribute our investments among different instruments and directions.

Based on my personal experiences, when investing in unicorns, there are many mistakes that investors can make, well, including myself. For instance, many sectors, such as digital commerce, recovered quickly during the crisis. However, some stocks in Indonesia, such as BUKA(2) or even GOTO(4), have not performed well and continue to trade below their IPO price. If we're planning on holding shares in these types of companies, we should avoid these types of failures by investing in broad markets. Somehow, by investing in exchange-traded funds, investors can earn and avoid "black swans," as well as other economic problems. The market's recent decline has also been perceived as an opportunity to buy in.

Anyway, as my closing of this article, the next question will be, are there any blacker swans in the works? Although it is possible to anticipate the financial markets, accuracy depends on intuition and skill. Unfortunately, there are too many black swan events that can occur, which can prevent even the most complex modeling from working. This does not mean that financial markets cannot be predicted, but it means that we must rely on more common sense and intuition. Investment portfolios should be designed to be black-swan-proof and crisis-proof. They should be able to withstand various types of shocks, and their old friends should be able to keep us informed about their performance. There are many unexpected twists and turns; preparing for the worst is important. But, according to my Idiotopedia, optimism is the best attitude, and it's the best way to protect ourselves. If we're investors with skills, make sure that we diversify our assets and use analytical tools to predict the movement of our market. Thus, stay positive, happy, healthy, and sane... Just enjoy the journey!

Carpediem!

(1) Ref to https://en.wikipedia.org/wiki/Pareto_efficiency/

(2) https://en.wikipedia.org/wiki/Harry_Markowitz

(3) Ref to https://www.bukalapak.com/?

(4) Ref to https://www.gotocompany.com/?