The black swan has become an excuse

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Nvidia manufactures the advanced processing hardware that is used for the massive computing needs of Big AI (OpenAI, Microsoft, Amazon, Anthropic, and others). Some of the hardware units cost more than $1.0 million each and orders from Big AI come in batches of 100,000+ units at a time.

Nvidia has been unstoppable, and recent estimates indicate a 12-month backlog of orders. Annual sales went from $27 billion in 2022 to more than $150 billion in the last year. Its stock price has followed and gone from $12 per share in late 2022 to a high of $153 per share recently.

As more and more demand for Nvidia processing units drove higher and higher sales, which in turn, drove the share price higher and higher, more and more investors piled into the stock. Many believed that since sales were so strong, there was a good reason for the increase in stock price. It felt like a balanced risk-reward calculation. And this is where the problem lies.

When a small Chinese AI company named DeepSeek released an AI tool that did not need top-end Nvidia hardware, Nvidia’s stock dropped from $143 to $118 per share in a single day.

People woke up and started questioning whether all that backlog and all those next generation processors were even necessary. There was no safety. We are not stock-price predictors here, but given the industry’s dislocations, it’s hard to believe that Nvidia’s future will be as bright as its past.

The “sudden” appearance of DeepSeek is what is called a Black Swan event. Nassim Nicholas Taleb (one of my favorite authors) coined the term in his book, Fooled by Randomness.

To illustrate, let’s stay with the stock market example. In 2023, the market returned 24.2% and in 2024, it was 23.3%. Wow, things have really been cooking lately. Now, the question: if the market has a 0.0% return or lower in 2025 or 2026, would you be shocked? Most people would be, but there is no logic to that thinking.

Over the last 10 years, the stock market has returned an annual average of 12.7%. Over the last 20 years, the number is 9.6%. So, a down year should be expected sometime soon, and we should not be taken by surprise and feel snake bitten.

When the market has a mini-crash, it is not the Black Swan event everybody will say it is because it was totally predictable – just look at the numbers.

Taleb is a great thinker and writer, but by adding Black Swan to our vernacular, he has given us an excuse for failure. (I would love to debate him on this, if I ever get the guts to call him.)

There are examples of this everywhere and this is the crazy part.  Boards, investors, and lenders still accept these never events as excuses from management for failed business ideas or complete business failures

Why? These constituents were complicit with management’s “plan,” so to call out management, they are calling out themselves. Easier to follow the crowd and hold that Nvidia position for another year because Nvidia is the leader in the field, right? When Nvidia’s stock goes to $40 a share because Microsoft (20% of Nvidia’s revenue) cuts its orders in half, we will hear the now-familiar refrain: Hey, nobody saw it coming, it was a Black Swan.

There is also another explanation: We have become lazy. It’s just easier to believe management and when things do not work out, throw them under the bus, replace them, and blame a Black Swan that came out of nowhere. Yeah right.

I’m sure you have heard the expression: If it’s not broken, don’t fix it. Black Swan events go hand-in-hand with my twist on this:

Something was broken, but nobody dared fix it.

What does this mean? Simply put, if everybody is making money, why ask too many questions?

In fact, this is the time to ask all the questions and not fall back on the Black Swan excuse when things fail.

Key Takeaways

• As I have said before, develop your FOMO radar. When everything is great, that is when you need to be the most cautious.

• When asked about publicly traded stocks, a veteran Wall Streeter once told me, “There are no more investors, we are all traders.” Consider this when investing for the long term.

• More people need to call management out on its plans — before everything starts to break apart.

Things I think about

Despite billions spent on test preparation, tutors, coaches and more, test scores on college entrance exams in the U.S. have declined by 3.0% in the eight years since the new SAT format was initiated.

Recommended Reading

Fooled by Randomness
The first in Caleb’s series and the “Black Swan” book. All his books are excellent.

Remarkable People Podcast
Hear from real thought leaders across culture, big issues, and anything else important.

Fortune’s Formula
The story of the Kelly Formula, still in use today at casinos and Wall Street.

Secrets
First-person account of the release of the Pentagon Papers. Well written story about what it’s really like to be a DC insider.

OpenAI is a Bad Business
Ed Zitron is a technology contrarian and not afraid of, well, anything.

Launch Key
Weekly newsletter full of wisdom on how to launch a business.

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