Jason Pohl
Black swan events are low in predictability but high in impact. Crucially, it’s not the share price performance that is the focus of business during these events, rather the performance of the underlying business. For investors, a black swan event is usually a cause for panic, and it’s a good idea to put in place preventative measures to protect portfolios from unpredictable risks. But black swan events may also have a silver lining.
In his book ‘Antifragile: Things That Gain From Disorder’, author Nassim Taleb introduced the concept of antifragility. It is based on the idea that randomness, uncertainty, and chaos are all good things, and when systems come under stress, they build up resilience and improve. It’s about gaining from disorder – and antifragility is the antidote to black swan events.
How ‘antifragility’ fits into an investment strategy
The current environment is putting added pressures and stresses on businesses globally. There are production constraints, triggered by the pandemic and accelerated by the ongoing invasion of Ukraine. Inflation is increasing worldwide and the onset of a recession is becoming all too real. We are now living in a world that is shaped by supply, with the current inflationary environment being driven by these supply-related issues, as opposed to excessive demand.
It is a test for companies to see if and how they prevail through these headwinds.
Such events reveal resilient and growing companies, and these are the antifragile companies that investors should be considering adding to their portfolios.
What makes a company antifragile?
Companies that are flexible and move quickly to take advantage of opportunities while capitalising on market trends and demand will succeed competitively and provide long-term opportunities for investors. A company’s ability to do this makes it a sustainable company, and an antifragile one. Companies need black swans to stress-test their framework as a mechanism to ensure the company is in good shape and can continue to grow and perform under these uncertainties. Through times of market volatility, these investments are those that have been proven to outperform.
One example is IDP Education, a global student placement platform and IELTS distributor. The education sector felt the full effects of the pandemic, but IDP Education adapted by extending its competitive advantage to having a multi-destination strategy in place. Although the Australian market was the hardest hit, with the largest decline in student numbers, its other target market, the UK, remained relatively open during the pandemic making IDP Education more resilient to the pandemic than its competitors which only service single destinations. IDP Education is an antifragile company, resilient to these black swan events.
Domino’s is another example of a resilient and antifragile company. When the inflationary black swan swooped in, pressure was placed on franchises as inflation seeped into the costs of food and labour. As Domino’s continues to focus on franchisees, nurturing human capital, and continued operational efficiencies, we believe this will ensure that its store-rollout objectives will continue to be realised over the long term. It overcame these pressures by predominantly rolling out its coupon and loyalty programs to drive consumer behaviour toward higher margin products.
What the future holds
Market volatility is likely to continue in 2023 and investors need to not just react to black swan events, but use them as a time to assess how well a company performed under these tail events. Successfully emerging from a black swan gives substance to how sustainable a company will be in the long-term. Its ability to adapt and find competitive advantages is key to becoming an antifragile company. The market’s tendency to overreact to short-term events presents a unique investment opportunity for investors looking for resilient and antifragile companies to add to their long-term investment strategy.
Resilience and antifragility are the blueprint for living in a black swan world. And for investors, identifying these antifragile companies is the true secret to success in growing one’s long-term wealth.
By Jason Pohl, head of ESG officer
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