The Financial Lesson Hidden in Spain's Worst Storm
When Disaster Strikes
Today, I want to discuss an event that happened just over a week ago, which reflects how the world operates, and I’ll then try to apply it to the economy. Let’s talk about highly improbable events. This time, it struck Spain.
For those unaware, a massive storm recently hit southeastern Spain. Known as Dana, it disrupted all predictions and measurements, rendering them practically useless.
It all began with mild warnings in the media, escalating quickly to terrifying photos and videos.
At times, you’d think this was a third-world country. But no, we’re talking about Valencia, one of Spain’s most attractive cities after Madrid and Barcelona. We witnessed water sweeping away cars, flooding homes, and cutting off roads—everything in its path.
As always, this event has been politicized. Could more have been done? Could more lives have been saved? Possibly.
What few people realize is the statistical phenomenon known as the Black Swan.
Imagine you’re responsible for designing Valencia’s drainage system, tasked with ensuring it handles X liters per minute (or whichever measurement applies). “Logically,” the city planner will add a safety margin based on the worst recorded catastrophe.
But does this mean something worse can’t happen? Of course not. Just because it hasn't happened doesn't mean it won’t.
This is a frequent scenario in meteorology. We see it with massive waves, unprecedented earthquakes, winds exceeding 200 km/h… the list goes on.
What happened in Valencia is that most of the city lost power and access to food, water, and light.
Many might wonder why people didn’t have water stored at home—something so cheap and accessible. This makes me think about how often we, as humans, forget basic survival principles. Water is one, but another is physical health. People ignore these basics until a Black Swan strikes their lives.
The real issue is that life only gives us one shot, and we often leave it to chance.
Black Swan events occur frequently in the financial world as well. Take the case of the Hedge Fund Long Term Capital Management (LTCM), managed by Nobel laureates, yet they overlooked this concept.
With catastrophes like these, it's hard to say who benefits—if anyone. But those who do are often the ones holding insurance against unusual events or with policies far exceeding the value of their property, car, etc. Such people find themselves making substantial profits. Similarly, those hired to repair the damages benefit as well.
Moreover, with property values plummeting due to disasters, if your insurance payout is greater than the damage, you can "buy the dip" at a discount, simply by taking a “contrarian” position.
This is the simple objective of an asymmetric portfolio. Having uncorrelated assets means that when some rise, others may not as much, allowing for balance.
Similarly, buying inexpensive insurance against Black Swans can ensure that when a financial catastrophe occurs—and it will—we’re prepared.
Remember, just because it hasn’t happened, doesn’t mean it won’t.
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