How Rule #1 Investors Prepare for Black Swan Events

Black Swans Aren't Rare—They're Inevitable

You’ll never forget your first Black Swan event. Or your second. Or your third. I’ve been through quite a few in my 40+ years of investing—and let me tell you, they always come when people least expect them. That’s why we, as Rule #1 investors, don’t try to predict the next crash. We prepare for it.

A "Black Swan event" is an unpredictable event with massive consequences. Most investors are blindsided, but those of us who follow Warren Buffett-style investing can actually use these rare events to build wealth—not lose it. In this post, I’ll walk you through some of the biggest Black Swan events of the last several decades and explain how to approach them through the lens of Rule #1 Investing.

What Is a Black Swan Event?

The term “Black Swan” comes from the discovery of black swans in Australia—something European naturalists didn’t believe existed until they saw one. In the investing world, the term was popularized by Nassim Nicholas Taleb to describe rare, unforeseen events that have massive, disruptive impacts on markets and economies. The irony is that these events seem obvious in hindsight, giving us the illusion we could have predicted them. But by definition, we couldn’t.

In the world of Rule #1 Investing, these events don’t scare us—they galvanize us. Black Swans expose the fragility in portfolios and systems that rely too heavily on conventional diversification and market timing. Our job isn’t to forecast the next catastrophe. It’s to be ready.

It’s not the storm that breaks you—it’s being unprepared for the storm.

A Rule #1 Approach to Unpredictable Markets

What sets Rule #1 Investors apart is how we behave when everyone else panics. Rather than reacting emotionally, we stick to our principles: avoid speculation, understand the businesses we invest in, demand a margin of safety, and always protect our capital. We move to cash during periods of irrational exuberance and act when fear dominates the market.

We don’t need to guess when a Black Swan will hit. We just need to recognize when the market is overvalued and position ourselves to act decisively when an opportunity arises.

What Four Major Black Swan Events Taught Me

Black Monday: October 1987

Back in 1987, the Dow dropped 23% in a single day—the worst one-day percentage drop in U.S. stock market history. It was fueled in part by computerized trading strategies and a sense of invincibility after years of upward momentum. I had already moved to cash because valuations no longer made sense. When the crash came, I was ready. It gave me a chance to buy great companies at bargain prices.

Dot-Com Bust: 2000–2002

The late 1990s were a wild ride. Everyone was betting on internet companies with no profits, and often, no products. At the peak, Yahoo was trading at a price-to-earnings ratio over 12,000. That’s not a typo. When the bubble burst, the NASDAQ lost nearly 80% of its value. The lesson? Avoid businesses you don’t understand. Speculation may offer fast gains, but investing in companies with real earnings and strong moats is how you build wealth sustainably.

The 2008 Financial Crisis

This was a classic case of systemic fragility. The housing market collapsed under the weight of bad debt, poor regulation, and overleveraged banks. Credit froze. Lehman Brothers vanished. Millions lost their homes and jobs. I had already begun exiting the market in 2007. When the dust settled, I was sitting on cash and able to scoop up undervalued companies. The result? Returns that far exceeded the market average for years to come.

COVID-19 Pandemic: 2020

The market dropped 36% in just 18 days. That’s not a crash—it’s a free fall. This time, ETFs and algorithmic trading exacerbated the panic. Buffett dumped his airline holdings immediately, concerned about their debt levels. I also moved quickly, trimming any exposure to companies that couldn’t survive a prolonged downturn. Once again, cash was king. Our team got back into strong businesses before the market’s rapid recovery.

Why the Next Black Swan Might Be Even Bigger

Today’s market environment is fraught with risk. Geopolitical tensions, runaway national debt, inflation, AI-driven disruption, and the rise of passive investing have all created a financial ecosystem that is more interconnected—and fragile—than ever.

More than 50% of all assets are now in index ETFs. That means when the market starts to fall, those funds must sell to maintain their allocations. Selling begets more selling. Liquidity vanishes. Prices plunge. And as we saw in 2020, this can happen with breathtaking speed.

Meanwhile, valuations remain historically high. The S&P 500 trades at a price-to-earnings ratio over 28, which equates to a yield of around 3.5%—lower than a 10-year Treasury. Investors are paying more for less, and that kind of irrationality doesn’t last forever.

The next Black Swan is coming. I don’t know when—but will you be ready?

How to Prepare for the Inevitable

The Rule #1 playbook hasn’t changed. We invest in businesses, not stocks. We protect our downside first and foremost. And we understand that the market’s job is to make you emotional—our job is to stay rational.

First, own businesses that can survive anything. I call these “anti-fragile” businesses—companies with strong cash flow, little or no debt, and economic moats that keep competitors at bay. These companies may take a hit during a crash, but they recover quickly because they continue generating value regardless of the economy.

Second, stay liquid. I can’t emphasize this enough. Liquidity gives you optionality. It gives you power. When the market crashes, it’s those with cash who make the deals of a lifetime.

Third, learn how to generate income while you wait. With Rule #1 options strategies, we’ve shown investors how to earn double-digit returns on cash without taking big risks. That allows us to stay patient while still compounding our capital.

And finally, pay attention to market signals. Watch the VIX for spikes in volatility. Keep an eye on valuation metrics like the Shiller P/E ratio. Most importantly, know your companies. Know when you’ll buy, and at what price.

Final Thoughts: Embrace the Chaos

The market’s volatility is not a threat—it’s a gift. It’s in the moments of chaos that we get the chance to buy wonderful businesses at wonderful prices. But that only happens if we’ve done the work ahead of time.

Make your watchlist now. Get educated. Learn to evaluate businesses the right way. And be ready with a mindset grounded in discipline and resilience.

You can either create generational wealth or get smoked. There is no middle.

The next Black Swan is coming. Let’s be ready.

Want Help Getting Ready?

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