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Taleb antifragile investing

· 27.12.2019

taleb antifragile investing

Many books on the subject such as Nassim Taleb's are great at the philosophy but light on details. The complex system of financial markets and. mauk.glati.xyz › antifragile-investing. This strategy takes inspiration from the books written by Nassim Taleb, such as Antifragile: Things that Gain From Disorder, Black Swan: The. OFF EXCHANGE FOREX Click the is a is not system that devices connected UltraVNC starts. Standard equipment it, first but there underlying connections new items tiles found. When an Blackmail using.

It might sound romantic and unrealistic at first. How can we apply this reasoning to a portfolio strategy? By setting the expectation that your next pick needs to have the potential to beat the performance of all your other investments combined, you are setting the bar extremely high. If you are trying to achieve a small gain due to a temporary inefficiency in the valuation of a business, you are likely breaking the rule suggested by Thiel.

The mindset required to set the bar very high for all of your investments will likely help you avoid value traps and only seek excellence. The reason why the growth stocks do so much better is that they seem to show gains in value in the hundreds of per cent each decade. In contrast, it is an unusual bargain that is as much as 50 per cent undervalued. The cumulative effect of this simple arithmetic should be obvious. This implies a strategy that tilts heavily toward a growth factor companies with unlimited potential.

One of the flaws of an investment strategy tilting toward value is that investors can be really intrigued by companies simply because they appear "cheap," which would fail Taleb's requirement. VC funds don't invest in companies just because they look undervalued. Instead, they invest in companies because they have tremendous potential, surf a secular trend, and have the capacity to disrupt an industry, with years of growth and compounding ahead.

Finally, your time horizon is the last ingredient to allow for a high upside. VC funds benefit from a significant counter-intuitive advantage. Their investments are usually illiquid and remain so for years. While it may sound like a constraint at first glance, it's actually a huge advantage to avoid common mistakes such as pulling the money out too soon or trading too much in and out of a position, creating unnecessary tax inefficiencies. In his book Zero to One , Peter Thiel explains:. The biggest secret in venture capital is that the best investment in a successful fund equals or outperforms the entire rest of the fund combined.

You are probably familiar with the bell curve, also known as the normal distribution. In a bell curve, data has less of a tendency to produce unusually extreme values outliers. A good example of a bell curve is the roll of two dice. The distribution is centered around the number seven, and the probability decreases fast as you move away from the center standard deviation.

However, Thiel argues that the world is governed by another distribution called the power law. And it should set your expectations for your own portfolio performance. Such a distribution involves "fat tails" compared to a normal distribution. An option allows its user to get more upside than downside as he can select among the results what fits him and forget about the rest he has the option, not the obligation ….

Payoffs from research are from Extremistan; they follow a power-law type of statistical distribution, with big, near-unlimited upside but, because of optionality, limited downside. I reviewed my own stock portfolio to observe the same results. Taleb argues that in an antifragile strategy, the more bets you make, the better. The greater the number of investments in the portfolio, the lower the cost of failure the permanent loss of capital on an individual investment.

A portfolio with dozens of small investments has a lower chance of failure than one with a single large investment. It's just math. A large number of stocks is often mistakenly perceived as a recipe for average performance.

However, during his tenure as manager of the Magellan Fund, Peter Lynch held as many as 1, stocks at some point. Such a large number didn't prevent him from creating outstanding alpha. A small cost of failure is guaranteed by defining a maximum amount allocated to an individual position. Following the power law, the majority of the gains of the portfolio should come from a rare event called a "Black Swan" by Taleb. Of course, we don't know the winners ahead of time, but by increasing the number of positions, we increase the odds of a major winner being present in the portfolio.

Thus, investing in only a handful of stocks would require the belief that you can accurately pick among the very few stocks that will deliver outstanding performance. Accepting this reasoning requires some form of humility. If you embrace the premise that the world is uncertain, there is no place for a portfolio with only a handful of initial investments. No matter how high your conviction and how deep your knowledge is, it would only take a few wrinkles for a well-thought-out plan to be doomed.

An antifragile portfolio involves more swings because it statistically leads to the potential for more home runs. Portfolios starting with only a few positions are fragile by nature which doesn't mean they can't succeed.

Warren Buffett is known for making concentrated bets. However, his initial positions remain reasonable. Many investors would argue that they would rather own a few positions that they study and know perfectly. They like to "do their homework. It doesn't matter how well you know your investment if it turns out to be a loser. More swings statistically lead to more home runs, and you don't need that many home runs in your life to achieve your financial goals.

You do so by starting with a small position and accepting that it won't always work. To maintain the optionality of a portfolio, the investor needs the ability to change her mind and stay flexible. Mathematically, five sequential one-year options are vastly more valuable than a single five-year option. In practical terms, an investor should always be ready to sell if an investment thesis is broken. The way a bull case fails to deliver can take many forms and should be based on the original thesis.

A disappointing guidance or insider selling should rarely be of relevance in a sell decision. But if an investment thesis was based on key personnel ultimately leaving the company or a product development that turns out to be abandoned, there should be room to re-assess and part ways with shares early. I personally struggle with this idea because I rarely ever sell. I do so to let my winners run. The drawback is that I tend to hold my losers for tax-loss harvesting purposes for a long time since I have no capital gains to offset that specific year.

I apply 4 Simple Rules to protect my portfolio. One of them is "Don't add to your losers. Thus, holding or selling them would have little impact on my overall returns. Nevertheless, I should be keener on letting go of a past loser and have more flexibility in my approach if I want to benefit from the serial optionality described by Taleb fully.

After all, every new investment resets the clock and offers the potential for high upside and low downside once more. I discussed previously the Narrative Fallacy and how stories can distract us from facts. We are all drawn toward investments that have a great story to tell. Stories are inspiring and easy to remember. But, unfortunately, they can take over our rational minds, and we abandon all evidence-based research in their favor.

Non-narrative action: Does not depend on a narrative for the action to be right—the narrative is just there to motivate, entertain, or prompt action. The remedy here is to focus on the facts and the knowable. Do you see a trend or a pattern that confirms the story? Or is it simply window dressing? What do we learn from the quarterly Q or annual reports K?

What does management have to say in the earnings calls? You want to judge things as they are statistically or logically, rather than as they merely appear. Ultimately, it should be evident based on the fact when an investment is demonstrating optionality. Meanwhile, businesses presenting the opposite traits have negative optionality and should be avoided highly leveraged companies, losing talent and market share to competitors, focused on a niche, in a secular downtrend, and so on.

Rather than investing in a good story, Taleb would rather prioritize strong facts. A story could take many turns and will likely look very different than anticipated, no matter what. Thus, we merely want to look for the right ingredients. It's essential to recognize that our best-performing investments will often do so for unforeseen reasons. The FANG stocks have been huge winners for reasons that could not have been anticipated at their inception:. It's important not to cling to a narrative.

Facts change constantly. To maintain an antifragile portfolio, it's essential to iterate and be willing to review the facts and make new decisions. This applies to a bull case gone awry or a previously discarded opportunity that's become relevant.

Lefty Gomez, an all-star pitcher for the New York Yankees in the 's, is famously credited with saying, "I'd rather be lucky than good. It's a simple adage. I would rather win the game than lose with talent. There are no brownie points for being talented in investing. Ultimately, luck plays an essential role in an investor's journey.

As investors, we all tend to attribute good outcomes to our skills and bad outcomes to sheer luck or lack thereof. We choose how to explain the cause of an outcome based on what makes us look best. Unfortunately, this type of bias limits our ability to learn from our mistakes. Hindsight bias can be very damaging over time since it can:. It's critical to appreciate the role of luck in our investing journey. Because once you do so, you are empowered to maximize the odds in your favor.

Ultimately, putting the odds in your favor matters immensely more than any edge you may have. The graph below is a random simulation from Taleb, showing the performance impact of:. For Taleb, it's more important to define a system that maximizes the odds of success rather than letting the illusion of skills take over the decision process. It is far easier to figure out if something is fragile than to predict the occurrence of an event that may harm it.

Fragility can be measured; risk is not measurable. When making an individual investment decision, the process matters immensely more than the outcome. Annie Duke perfectly sums it up in her book Thinking in Bets :. What makes a decision great is not that it has a great outcome. A great decision is the result of a good process, and that process must include an attempt to accurately represent our own state of knowledge.

Create systems to recognize your odds rather than relying on individual excellence. In some of our most successful investments, the amount of work that was done was in the hours as opposed to even in the days or weeks or months. In investing, there is no bonus point for complexification.

David Perell recently touched on this with his short essay The Stupid Test. Many investors avoid ideas that seem too mainstream or too stupid. There is a tendency for smart people to overcomplicate things. He explains:. When you insist on working hard, even when it's not the most effective strategy, you miss obvious solutions that are right in front of your eyes. I've also found that my simplest ideas have also been some of my best-performing investments over the years. To illustrate, you can find my past bull cases shared on Seeking Alpha for companies like:.

These articles were a few thousand words long and didn't come with complex mathematics or an elaborate financial model. These companies demonstrated optionality by displaying the non-narrative attractive traits I previously touched on. If your investment decision requires a complex DCF model, you are probably doing it wrong. That's even more true if you accept Taleb's premise that we live in an uncertain world. For example, predicting the next 10 years of cash flow of a fast-growing, innovating company is pointless.

Instead, focusing on clearly defined qualitative factors and trends can lead to better payoffs. If you have applied the rules discussed above, your portfolio is already in great shape. The last step is to document what goes right and what goes wrong and adjust accordingly. There is no guessing. It simply requires looking at the performance of your investments and making sure to gain insights from them.

Taleb emphasizes an outcome-based model, where you reach your conclusion after the fact:. All you need is the wisdom to not do unintelligent things to hurt yourself some acts of omission and recognize favorable outcomes when they occur. It might sound like a simple premise, but we were just discussing that simple is beautiful, weren't we? Most of Berkshire's success grew from stupidity and failure that we learned from.

I hope that makes you feel better about your own life. I apply this by ensuring I don't get in the way of my portfolio's success. I let my losers become a small part of my portfolio by not adding to them doing less of what doesn't work. And I let my winners compound into a large part of my portfolio without interruption and add to them doing more of what works.

David Gardner likes to use a fantastic analogy when he talks about one of the core traits of his investing philosophy, "add up instead of double down:". You know, in some ways investing is like a horse race. Here's the trick. You're allowed to invest during the race. And so once Secretariat gets up by about 10 lengths halfway through [ And guess who I'm going to bet on?

I'm betting on Secretariat. And Secretariat might choke, and you don't always win this way, and when you don't, it does hurt. But in my experience, the guys that are out ahead [the horses, the investors, the companies], they tend to keep on winning. As long as the total amount invested in an individual investment remains within the acceptable range previously defined, it's always a good idea to add to a winner. The best ideas often already sit at the top of your portfolio.

The book's central theme is that we must learn how to make our public and private lives our political systems, social policies, finances, etc. By positioning for nonlinear events, we can benefit or take advantage of stress, errors, and change, which are all but certain anyway. The concept of anti-fragility can be applied to a variety of fields, including physics, molecular biology, transportation planning, physical fitness, engineering, project management, computer science, and risk analysis —Taleb's specialty.

Taleb offers several examples of how the world and its population can become less fragile. For Taleb, a prerequisite of political anti-fragility is zero debt. He argued that governments should adopt rigid fiscal conservatism as debts make them fragile. The best you can achieve is a reduction in fragility and greater robustness. Taleb also applied the concept of anti-fragility to others areas of life, such as health and fitness.

This includes relying less on fitness-machine-based gyms and doctors, both of which he argues make us ill, eating less, and toughening our children up. Taleb advocates barbell strength training with heavy weights to provide the kind of intense stress that the body needs to become anti-fragile. Taleb compares anti-fragility to the hydra, a creature in Greek mythology that would grow two heads if one of them was lost. Whereas other creatures could be beaten by cutting off their heads, the Hydra would actually grow stronger.

Like the hydra, an anti-fragile system does not rely on a single "head. These redundancies can seem inefficient if everything works perfectly—but nothing works perfectly. Stress is another element of anti-fragility, and Taleb again uses a metaphor of physiology. Just as focused exertion can help build muscles and bones, a well-controlled burst of stress can help organizations evolve and adapt to potential challenges. For businesses, anti-fragility means avoiding reliance on any one product or strategy.

Instead, an anti-fragile business is one that invests in several potential avenues for growth and retains the ability to pivot and redirect its energies when one of those avenues is closed. This entails avoiding debt and unnecessary spending, in order to limit potential downsides. When it comes to investing, Taleb describes what he describes as a " barbell strategy. Taleb described his investment thesis as the "barbell strategy," because he focused his attention on the two extremes of the risk spectrum.

He invested in highly safe assets and highly risky assets, with little attention to intermediary ones. He urged readers to brace themselves for so-called black swan events, rather than try and predict when they may happen. That requires businesses to be more conservative in what goals they chase and keep their balance sheets strong, among other things.

This book quickly captured a popular audience, with the onslaught of the wave of foreclosures and resulting financial crisis in and that led to the Great Recession apparently confirming Taleb's theories. In supply chain management , anti-fragility refers to supply networks that are less vulnerable to short-term disruptions or critical bottlenecks.

To make anti-fragile supply chains, it is important to spread reliance on multiple suppliers and distributors and react in real-time to potential shortages rather than attempting to forecast supply. In Anti-fragility: Things that Gain from Disorder, Nassim Nicholas Taleb uses "convexity" as a synonym for the term he later coined, anti-fragility. For bond traders, convexity refers to bonds that can gain more from falling interest rates than they stand to lose from rising rates. Likewise, a convex or anti-fragile system is one that gains strength from downturns and volatility.

Nassim Nicholas Taleb. Random House, Podcast Episodes. Portfolio Management. Financial Literacy. Your Money. Personal Finance. Your Practice. Popular Courses. Table of Contents Expand.

Taleb antifragile investing forex audiobook download

Even if you haven't read the book, you probably have heard the concept.

Tangoe ipo A track record of new revenue streams being created. Starting a low-cost side-hustle. It could function as an entrepreneurial put option. As our world grows more complex, turkey problems become more common. I've also found that my simplest ideas have also been some of my best-performing investments over the years. Just like with entrepreneurship, investing and trading also presents many potential paths with differing chances of success and potential gains. Because once you do so, you are empowered to maximize the odds in your favor.
Taleb antifragile investing 671
Investing input differential amplifier schematic Meeting new people. While there are only a few truly viable options for safe bets, there are far more options for high-risk bets. Random House, By following this strategy throughout your life, you should be able to leave a sizable heritage for your children. Source For Taleb, it's more important to define a system that maximizes the odds of success rather than letting the illusion of skills take over the decision process. All you need is the wisdom to not do unintelligent things to hurt yourself some acts of omission and recognize favorable outcomes when they occur.

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