Here's What the CrowdStrike Outage Can Teach Investors About Black Swan Events

Over the last week, the technology sector has been taken over by one singular storyline -- and for once, it doesn't revolve around artificial intelligence (AI).

Last week, investors were shocked to see shares in cybersecurity company CrowdStrike (NASDAQ: CRWD) suddenly fall off a cliff.

News quickly circulated that CrowdStrike suffered a widespread outage following a bug in its recent software update. While bugs are fairly common in software development, the CrowdStrike situation has been particularly problematic due to the company's widespread reach -- spanning a reported 30,000 subscribers.

Considering the unforeseen nature and total randomness of the CrowdStrike outage, I thought it prudent to take a look at other black swan events and assess how investors may want to approach portfolio management going forward.

What are black swan events?

The idea of black swan events gained popularity thanks to author Nassim Nicholas Taleb's acclaimed book, The Black Swan .

Essentially, a black swan event is unpredictable and impacts many people.

The COVID-19 pandemic is the most recent example of a black swan event -- one that caused widespread implications around the world and heavily impacted areas such as healthcare and the corporate workplace.

Additional notable black swan events also include the Great Recession as well as the stock market's flash crash in 1987, commonly referred to as Black Monday .

Image source: Getty Images.

What happened with CrowdStrike?

One of the common threads stitching the black swan events listed above together is that each resulted in outsized financial implications. The current situation with CrowdStrike is no different.

CRWD Market Cap data by YCharts

At the beginning of the month, CrowdStrike boasted a market capitalization of roughly $95 billion. Per the chart above, investors can see that between the beginning of July and the initial reporting about the company's glitch, CrowdStrike lost roughly $20 billion in market cap.

As of the time of this article, CrowdStrike's market cap is hovering around $63 billion, implying another $10 billion of value wiped out since the initial sell-off.

Shoulda, coulda, woulda

There is a lot to learn from black swan events. Whether the Bear Stearns or Lehman Brothers bank collapse in 2008 or the more recent COVID-19 pandemic, the broader idea is that the economy strengthens after periods of unforeseen disaster.

If you took on some risk and invested in the stock market during these crises, you likely made some generous returns. This underscores the resilient nature of economies and capital markets and supports having a long-term time horizon when investing.

Although I would not encourage investors to assume a high level of paranoia, I think it's prudent to continuously monitor the broader economic environment and not just your individual stocks.

Considering that black swan events are unpredictable, getting a better and more thorough understanding of what is going on in the world can be a helpful tool in assessing what risks or catalysts may be present in your particular holdings and, therefore, be a useful tactic in active portfolio management.

It's easy to get down on yourself if you've held onto a stock and it suddenly goes into free fall. But knowing when to sell a stock is akin to being a mind reader -- it's impossible to know for sure.

Instead, selling a stock should be rooted in whether or not you've lost conviction in a company or its leadership or if you've recognized substantial gain and feel that taking money off the table is the right idea.

In the case of CrowdStrike, it was impossible to know that a software glitch would suddenly occur and inspire widespread fear and panic selling among investors.

But like in any black swan event, it's important for investors to zoom out and think about the bigger picture.

While I suspect some of the reputational damages will persist for some time at CrowdStrike, I do not see the stock as a falling knife . Just like the broader economy, CrowdStrike has been a strong performer over the last several years.

Moreover, the current sell-off is far from the only time CrowdStrike stock has tanked.

Although it's certainly going to be an uphill battle for CrowdStrike to win over the confidence of its customers and the investment community again, I think the company's best days are indeed ahead. As history has demonstrated, investors simply need to exercise some patience as the company recovers from its current lowlight.

Adam Spatacco has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends CrowdStrike. The Motley Fool has a disclosure policy .