However, black swan events can be a product of things outside of the economy that ultimately impact the economy (think the 9/11 terrorist attacks or the COVID-19 pandemic). The events I walked you through above are all examples of black swan events.
One of the primary reasons why crisis equates to opportunity in the stock market is the occurrence of “black swan” events.īlack swan events are rare and unexpected events that significantly impact the market and can cause a rapid decline in stock prices. You may be wondering why I am taking you down this seemingly random walk down memory lane.
Learn from the Market’s Past to Understand the Future Then, the devastating crash came which sparked the demise of large banks such as Lehman Brothers and Bear Stearns. You guessed it! Like the dot com craze and Tulip Mania before it, this didn’t end well.įirst, rampant real estate speculation led to unsustainable prices. Large banks’ excessive risk taking and over-lending aimed at low-income home buyers led to a speculative bubble. The housing crisis of 2008 was yet another example of excesses in one direction leading to excesses in the opposite direction. Many other names went on to have price-to-earnings (P/E) ratios of over 300x earnings – numbers that would wake Warren Buffett up at night. Netscape soared from $28 to nearly $75 a share on its first day of trading! com in the name and sent it into the stratosphere. Though most internet stocks had yet to turn a profit, investors piled into any stock with a. However, just like the Tulip Bubble before it, investors suffered from irrational exuberance. Investors began to realize that the internet would change how we take in information. In fact, unless you’re hundreds of years old, the first instance happened long before you were born.ĭuring the Dutch Golden Age of the 1700s, tulip speculation ran wild.Įven though there was little real-world value or use around tulips, the price soared to the equivalent of ten times the annual salary of a skilled artisan!įast forward to 1999, and a similar phenomenon occurred with the burgeoning internet sector. Long before Wall Street was even conceived of, history was littered with boom-and-bust periods. However, if there is one lesson stock market history has taught me, it’s that a short-term crisis often makes way for longer-term opportunities. The advent of the 24-hour news cycle, up-to-the-second trading platforms, and low-commission trading (or commission free in many instances) can make your head spin and make matters worse in many instances. As modern-day investors, it can be easy for us to get caught up in the day-to-day fluctuations of the stock market.
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