Overreact on Black Swan Event?

What seems to happen these few weeks on the stock market globally is aggressive sell down of stocks due to fear of economic impacts of falling oil price. The regional market fell sharply yesterday (15-Dec-14) after US stock market experienced its worst weekly performance since 2012.

Is falling oil price and all the other uncertainties resulting from it creates a “Black Swan Event” fear that had caused investors from all around the world dumping their shares like no tomorrow? Most likely yes.

So, what is black swan event? The concept of black swan events was popularized by the writer Nassim Nicholas Taleb in his book, “The Black Swan: The Impact Of The Highly Improbable” (Penguin, 2008). The essence of his work is that the world is severely affected by events that are rare and difficult to predict. The implications for markets and investment are compelling and need to be taken seriously. A classical example of black swan event was the 9/11 attack. Another example was the Flash Crash event in 2010 where the Dow Jones plunged 1000 points on May 6,2010.

Black Swan


The main idea in Taleb’s book is not to attempt to predict black swan events, but to build robustness against negative ones that occur and be able to exploit positive ones. Regardless of whether the current oil crisis is a black swan event, the majority investors have become so bearish and panic and joined in the bandwagon of massive selling. Most were selling with a big loss! From study, it is always the retail investors (i.e. you and me who are not institutional) who tend to sell down in event as such and realizing big losses in their portfolio. They established phobia towards the market and would not enter into market until it turns very bullish again (at which time when market tends to be overpriced back again).  So, an average retail investor will never get to maximize profit by  “buy low, sell high”.

That’s not to say you should always shrug off a black swan events – or that you shouldn’t try to find a way to spot when the market might be more vulnerable to black swans and brace yourself for them.Markets tend to overreact when there are a lot of investors in an asset class who are smug and complacent and who don’t really know what they’re doing. Just like the current oil crisis, none of the oil and oil related counters are spared from massive sell down. Are all the oil related counters so dependent on oil price? Not entirely so. In fact most of the offshore oilfield services providers like Bumi Armada, SKPetro have got their order book for this year and next year filled already with contract price not subject to oil price. Current sell down might have well priced in the income effect of likely reduced contracts from petrol player such as Petronas due to its CAPEX cut. Any further sell down may deem to be irrational and overreact in my opinion.

Also, bear in mind that current sell down like the one on yesterday (1001 counters down) were seriously unusual and indeed an act of overreact. All the sectors suffered from massive sell down regardless of whether it is oil related or otherwise. Some counters suffered as much as 15% loss within a day and this is truly scary.  My prediction is that market fear will continue to brew up towards the end of the year, as most investors/punters were panic and the only action to comfort them would be selling, selling, and selling.


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