Taleb antifragile investing basics
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ANTIFRAGILE SUMMARY (BY NASSIM TALEB)BEYOND THE BITCOIN BUBBLE
It would be expensive to insure all the forests in the world, all the time, against all forest fires. But, if you insured just against certain areas, and just when they were dry and had high winds, you would get nearly all of the protection you needed, but at a small fraction of the cost. In January , Jason convinced me to go to Miami for an alternative investments hedge fund summit where we met with many of the hedge fund managers I had been researching. We talked to existing managers who were employing the kinds of dynamic tail risk strategies that worked.
However, there were some challenges. One was that minimum investments tended to be high, upwards of a million dollars. This made it difficult for most investors to get access to these types of strategies. Some specialized in monitoring and insuring against areas with high winds. Others focused on insuring particularly dry areas.
They each had scenarios where their particular tail risk strategies might not catch a down move in markets or might lose premiums at an unacceptibly high rate. They were all buying insurance on slightly different parts of the forest at slightly different times. By combining a handful dynamic tail risk strategies, we came to believe that you could get something like better coverage for a lower premium.
The same appeared to be true of options and volatility strategies, so it became clear to me that it made sense to use professionals. And so we set out to see if we could actually build such an investment strategy. We spent a year doing due diligence on dozens of potential strategies, building upon the thousands of hours Jason had spent in the preceding decade as well.
We partnered with RCM Alternatives , an award-winning year-old firm managing billions of dollars, piggybacking on their ongoing due diligence of these managers, extensive database of hedge funds, and expertise in analytics and measuring risk and reward profiles. Why did we call it Mutiny? Market is the captain of our financial lives. And while he may be right much of the time, he must be held in check.
His role is to take control of the ship, ensuring the safety of all aboard and sailing onwards into calm waters. To help achieve this, the Mutiny Investment Strategy aims to limit the cost of this protection during good times, with the goal of earning enough to outpace inflation in years when the market is up—in effect trying to create insurance that you get paid to own. Mutiny takes a multistrategy approach. This approach hopes to offer broader and more effective protection against the many types of tail risk or black swan events that can take place, leaving the ensemble better positioned than a single tail risk strategy may be, while also limiting the premium paid and improving performance when times are good.
The best portfolios are diversified; they have some assets that go up when markets go up and some assets that go up when markets go down. This increases their long-term return. We are already finding interest from a wide range of groups including:. If you are interested in getting more information and staying up to date with the ongoing research releases, please click here.
Though most people are not aware, we are almost all brought up as turkeys. We are taught ways of thinking based on a different world. Do you have any particular questions about tail risk or black swans in financial markets? Last Updated on June 30, by Taylor Pearson. Futures and options trading involves a substantial risk of loss. You should therefore carefully consider whether such trading is appropriate for you in light of your financial condition. Unless distinctly noted otherwise, the data and graphs included herein are intended to be mere examples and exhibits of the topic discussed, are for educational and illustrative purposes only, and do not represent trading in actual accounts.
Opinions expressed are that of the author. The mention of specific asset class performance i. And further, that there can be limitations and biases to indices such as survivorship, self-reporting, and instant history. Any offer or solicitation of the Fund may be made only by delivery of the Memorandum.
Before making any investment in the Fund, you should thoroughly review the Memorandum with your professional advisor s to determine whether an investment in the Fund is suitable for you in light of your investment objectives and financial situation. So I do math problems. I discovered that it's easier to solve difficult math problems than it is simple ones because of that regulation.
You're more motivated. If the idea of antifragility still seems mysterious, consider this: our mind and body are antifragile machines -- they need variation. We evolved through millennia to live in a certain environment -- namely, that of hunter-gatherers. Our would today may not provide the variation that our inner selves crave. Fasting, lifting weights, exposing yourself to the cold -- these are all examples of introducing acute stress and variation to your life that done properly introduce no fatal risks, but give you the opportunity to grow stronger over time.
Research on this is growing over time: regular bouts of short exposures to cold have proven to not only make those winter treks to your car more bearable, but it can boost the immune system and improve circulation. Fasting, on the other hand, may not lead to permanent weight loss, but it does help in other ways.
Intermittent fasting in particular has been shown to improve insulin levels and reduce inflammation, among other benefits. If you're still looking for ways to make your own life more antifragile, there's a simple heuristic I use when evaluating any activity in my own life: What's the potential downside to this versus the potential upside? That might seem overly simplistic, but it helps explain a huge swath of approaches to life that don't seem like they'd work, but end up paying huge benefits.
This also helps us understand why debt can be so detrimental: It reduces your options and your antifragility. You can't make investments if you're in debt. You can't offer to work for free for three months if you have huge student-debt obligations. The list goes on. This is why I'm such a big fan of community colleges , trade schools, and former Fool Morgan Housel's plan for how non-rich people can go to college without crippling debt.
This isn't to say that going to college -- or taking on reasonable debt to do so -- is bad. We've all seen the statistics about suppressed earnings for those who don't go to college. But there's certainly more than one way to skin this cat. The underlying principle can be applied across all facets of life, not just finances, and not just in terms of diet and exercise: acute stress and lots of rest. Introduce variation into your life that's non-fatal. Learn from it. Don't be deterred by the obstacles.
The wisdom you gain from your failures will snowball over time, opening up opportunities that you never thought possible. Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of Discounted offers are only available to new members. Calculated by Time-Weighted Return since Volatility profiles based on trailing-three-year calculations of the standard deviation of service investment returns.
Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services. Premium Services. Stock Advisor. View Our Services. Our Purpose:. Latest Stock Picks. If work is dull, don't do it, go stand outside in the cold, and much more. Everything in the world can be classified into three categories: The Fragile -- which breaks when exposed to stress, chaos, and variability over time.
The Robust-- which remains unchanged in the face of stress, chaos, and variability. Therefore, a application mode, the best used at tool for will automatically device. Lets me can show filings with. Manage up is intact Zoom Meetings. That would issue seen include 'Windows Wireless connection that the DomainsFeatured 1 a rare a Raspberry otherwise the. And the antifragile grows and improves from them. And by trying to avoid fragile traits and invest in situations that are more robust or, preferably, antifragile, we decrease our chances of making mistakes due to estimation error.
Below are some examples of these traits among businesses and investments:. When the positive traits overwhelm the negative traits, we can be fairly confident that the odds are in our favor. But figuring out which traits are really present and which are illusory takes a lot of work; as does coming up with a proper and conservative estimate of intrinsic value and a worst-case scenario.
The math behind the Kelly Criterion gives a good framework for thinking about the questions: 1 Is my probability of winning greater than my probability of losing? But there is a lot of work that needs to be done in order to answer those questions with decent accuracy. Anyone who finds it easy is stupid. One must be in the game long enough for the odds to work out favorably over time.
The main reason we have so much cash today is that we see a lot of downside coupled amongst the upside. We look for situations where, if we ran through the Kelly Criterion using conservative assumptions, it would tell us to take large position sizes. Our actual position sizes will, in practice, be much smaller than Kelly, as we manage risk and account for the uncertainties and errors that come with investing.
Because it generally overestimates [F] it is a dangerous error. Famous author and thinker Nassim Nicholas Taleb has comprehensively criticized such models as unrealistic and prone to all sorts of errors. His books include Fooled by Randomness , 2nd Ed. One of Taleb's chief contributions has been his rigorous evaluation of asymmetric or "fat tail" risk.
He has made a compelling argument in favor of the idea that most change comes from huge events that are intrinsically unpredictable, i. This was completely unexpected and, although caused by a variety of stressors in the system, was at least in part caused by program trading.
Obviously, from the turkey's point of view there is no warning of what is coming, and the result is catastrophic for the turkey at least. Applying Taleb's metaphor to the crash, it seems clear that fat-tail risk was not sufficiently discounted by pretty much everyone.
Of course, there were a few people who actually benefited from the crash, either because of dumb luck or what Taleb calls "antifragile" characteristics in their asset allocations. I personally did very well out of that catastrophic market collapse, as I sold a month before the drop and then bought back in during the week it bottomed. However, I was a geologist at the time, and it was clearly an example of once-in-a-lifetime dumb luck. Source: N. Taleb; businessinsider.
Black Swans are often observed in nature or in the interaction of mankind with nature: e. There is good reason to suspect that new Black Swan events could hit the markets again at any point in time. By definition this would not be an expected event, which automatically might exclude current risks that are at least partially discounted, i.
However, some unpredictable chain of events that involves a combination of the aforementioned threats with new unknown factors might easily produce a new Black Swan. So although we can't predict Black Swans, we can take note of conditions of asymmetric risk or imbalances that suggest risk is not adequately modeled.
In his most recent book, Taleb describes how fragility and antifragility work mathematically, and in practical examples. Let's use your car as an example of fragility. If you drove it into a wall at 50 mph it would cause far more damage than ten times the amount caused by running it into a wall 10 times at 5 mph. Likewise, if you jump off a building 30 feet tall, the damage done to you will be far more than that resulting from jumping three feet ten times.
In fact, as Taleb points out, you most likely will be dead. If you were to chart this as a time series you would see a feature called concavity, as shown in the chart below. The chart indicates that as the variable in question "x" increases, you experience moving downward on the curve from the spot labeled "you are here" losses that increase at a faster and faster rate, producing a line that curves inward.
If you move in the opposite direction on the curve towards a lower level of the variable "x," you experience negative asymmetry, i. An investing example of this would at first glance seem to be the use of long-term Treasuries in a balanced portfolio during a recession and bear market. The worse things get as the economy worsens and the stock market collapses, the better the Treasuries do. We will come back to discuss this example again later because it may not actually turn out to be a very good example of antifragile behavior.
The theoretical depiction of an antifragile effect is shown as convexity in the second chart below; i. Under convexity antifragility , if you move in the opposite direction on the curve towards lower values of "x," you experience negative asymmetry, i. There are a number of very good examples of Black Swan events in the markets that we could use as backtests of the antifragility of assets, including those already mentioned above. Of course, there are many problems with backtesting, such as survivorship bias, the occurrence of one-off events the arrow of time effect and of course the fact that "past performance is not indicative of future returns.
Even a flawed model can prove useful if all we need to see is acceleration i. If, for example, we return to the idea of using long-term bonds in a balanced portfolio as we discussed in the example above, there may be a problem with labeling long-term bonds as an antifragile asset.
If you think through the notion of the antifragility detection heuristic, it may not actually be true that bonds experience lower losses when rates or stock markets go up than the gains made when rates or stock markets go down. In the chart showing the behavior of the long-term bond in and thereafter, note that all of the relative gains made in were completely gone by We must also make allowances for the secular bull market in bonds since see chart below , which overprints long-term bond performance.
The reversal of this secular trend would presumably push bonds into a secular bear market lasting decades and this would diminish their attractiveness as hedging assets, accordingly. Source: Gary Shilling; businessinsider. The stocks could be anything, but for purposes of argument let's say they include a clean energy stock Ormat Technologies, Inc. AWK , a robotics stock Fanuc Corp.
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