Anti-fragile Nassim Taleb

[shawster]

I didn't see a dedicated thread to this book or any of the other's in Taleb's Incerto series (Fooled by Randomness, The Black Swan, Anti-fragile and The Bed of Procrustes). Taleb's ideas are definitely out of the mainstream, but I think there are some powerful principles that are good to consider in a financial independence context as well as health and fitness applications. He explains that there is no actual word that describes the opposite of fragile-something that is reduced under stress or upset. Thinking that everything will go as we expect is a recipe for disaster and Taleb encourages embracing and benefiting from uncertainly and randomness.

Just a couple of ideas from those books:
Using a barbell investing strategy: 10% super risky and 90% super safe. By super-risky, he proposes financial instruments with ~10x the potential return of your desired allocation and by super-safe meaning cash or ultra-short duration money market funds or TIPS. In theory if your risky part has 10 times the potential return and is only 10% of your portfolio, you are essentially at your desired risk target, but your upside is unlimited and your down-side is limited to the 10% you've put in your risky portion. In practice that can be harder to do, but I'm assuming he's employing buying call and/or put options with long durations to minimize time decay losses, i.e feeding the turkey for a year before Thanksgiving.
He also discusses happiness through subtraction. Rather than buying what you think will make you happy, which is generally not successful, he discusses removing things from your life that make you unhappy.

Lots of other anecdotes and ideas that would be beneficial as it relates to what uncertainty actually is vs. how it is often portrayed in the media-think Las Vegas, which as he shows is extremely safe for the casino.

[milesdividendmd]

I loved antifragile and wrote about my impressions here...

http://www.milesdividendmd.com/the-most-interesting-man-in-the-world/

But one thing I have learned from following taleb on Twitter is that he is a train wreck as a person. Just a total narcissist.

His insights remain valuable but he is a fatally flawed human being who is an incredible hypocrite.

But the book is a must read and remains very influential for me personally.

[shawster]

Great review and great site @milesdividendmd. I agree that Taleb is better studied in principle than his personal behavior. I could detect quite a bit of ego throughout most of his books, but was able to deal with it knowing that the next tangent would likely be more interesting and the narcissism would abate. It's certainly not the most well-written book in my library.
I've been trying to develop some type of model portfolio based on his thoughts, but so far haven't had the time to devote to analyze it. I think it's an incredibly interesting idea and one likely to pay off extremely well at some point in the future. I'm hoping to figure out how I can incorporate those ideas into my portfolio to at least reduce the fragility of my portfolio as I work toward financial independence.

[forummm]

I want to read the books sometime. But MDMD is right--that dude really appreciates himself. I've listened to a bunch of Econtalk interviews with him. Kinda smarmy how much he thinks he's the cheese.

[EscapeVelocity2020]

I read 'Black Swan' but didn't have any life-changing experience from it.  However, whenever Nassim shows up on EconTalk, I really enjoy it...  http://www.econtalk.org/archives/_featuring/nassim_taleb/

(modified, I hadn't seen forummm's response along the same lines.  Wasn't commenting on his personality, but Nassim's theories are interesting and unique)

[kendallf]

I'll join the chorus; I took him off my FB feed because I got tired of his personality.  The books are interesting; him personally, not so much. 

I like the idea of the 90/10 portfolio. 

[forummm]

I read 'Black Swan' but didn't have any life-changing experience from it.  However, whenever Nassim shows up on EconTalk, I really enjoy it...  http://www.econtalk.org/archives/_featuring/nassim_taleb/

(modified, I hadn't seen forummm's response along the same lines.  Wasn't commenting on his personality, but Nassim's theories are interesting and unique)

Agree they are interesting views. I've listened to all his Econtalk interviews, so his manner hasn't put me off enough to stop. And I do plan to read the books too.

[MgoSam]

Yeah, I know people that have met him at conferences and a former colleague of his and they think that he's really smart but an utter jackass. That said, none of us here have to marry the guy, just look if there is any great advice.

[milesdividendmd]

Great review and great site @milesdividendmd. I agree that Taleb is better studied in principle than his personal behavior. I could detect quite a bit of ego throughout most of his books, but was able to deal with it knowing that the next tangent would likely be more interesting and the narcissism would abate. It's certainly not the most well-written book in my library.
I've been trying to develop some type of model portfolio based on his thoughts, but so far haven't had the time to devote to analyze it. I think it's an incredibly interesting idea and one likely to pay off extremely well at some point in the future. I'm hoping to figure out how I can incorporate those ideas into my portfolio to at least reduce the fragility of my portfolio as I work toward financial independence.

Thanks man, glad you liked the review.

Taleb has had one truly amazing insight about the role of randomness in our life, and its implications are profound.

I would still gladly read another book of his.

It's interesting that it matters to me so much that he is a flawed human being. Intellectually it really shouldn't.

But there you have it. MMM has had one amazing insight with profound implications best summed up in his "shockingly simple math post," and this insight was certainly less original than Taleb's. But it really mattered to me when I met Pete and found him to be a genuinely good person with real integrity.

So there you have it.

[milesdividendmd]

One more point about harnessing the concept of anti-fragility in terms of investment strategies.

Much of my attraction to dual momentum was born from my search for an anti fragile portfolio.

Dual momentum performs at its best by avoiding large drawdowns (black swan events) . In this way it is antifragile: it benefits from randomness.

[shawster]

One more point about harnessing the concept of anti-fragility in terms of investment strategies.

Much of my attraction to dual momentum was born from my search for an anti fragile portfolio.

Dual momentum performs at its best by avoiding large drawdowns (black swan events) . In this way it is antifragile: it benefits from randomness.

I am very interested in the dual momentum strategy and looked through your article on the subject. I am doubtful that the CAGR will remain what it is going forward, but even if it's lower, it does reduce the frequency and amplitude of the negative returns, which I find interesting.

I'm not sure that it's a true anti-fragile or black swan resistant portfolio in the sense of the books since you would have 100% of your money focused in a certain sector of the global market and would be susceptible to black swan events in those particular areas until you rotate out at the end of the month. However, it takes much less work to manage that portfolio than a true anti-fragile portfolio and I can't image you could have done significantly better over the last 20 years.

I suppose if you wanted to construct an anti-fragile, dual momentum type portfolio, you could buy long duration call options of the ETF currently recommended by the dual momentum methodology with the 10% of your portfolio that is to be the risky portion and keeping the rest in cash. Longer duration costs more but suffers less from time decay. The problem I see with this is that you can potentially get killed with cost spreads the of options I would use for the international and emerging markets. I have no experience with futures, but that might be a better option in this particular instance.

[milesdividendmd]

One more point about harnessing the concept of anti-fragility in terms of investment strategies.

Much of my attraction to dual momentum was born from my search for an anti fragile portfolio.

Dual momentum performs at its best by avoiding large drawdowns (black swan events) . In this way it is antifragile: it benefits from randomness.

I am very interested in the dual momentum strategy and looked through your article on the subject. I am doubtful that the CAGR will remain what it is going forward, but even if it's lower, it does reduce the frequency and amplitude of the negative returns, which I find interesting.

I'm not sure that it's a true anti-fragile or black swan resistant portfolio in the sense of the books since you would have 100% of your money focused in a certain sector of the global market and would be susceptible to black swan events in those particular areas until you rotate out at the end of the month. However, it takes much less work to manage that portfolio than a true anti-fragile portfolio and I can't image you could have done significantly better over the last 20 years.

I suppose if you wanted to construct an anti-fragile, dual momentum type portfolio, you could buy long duration call options of the ETF currently recommended by the dual momentum methodology with the 10% of your portfolio that is to be the risky portion and keeping the rest in cash. Longer duration costs more but suffers less from time decay. The problem I see with this is that you can potentially get killed with cost spreads the of options I would use for the international and emerging markets. I have no experience with futures, but that might be a better option in this particular instance.

I agree that past being prologue, DM is unlikely to be a truly antifragile approach since it does not actually benefit greatly from randomness (like selling call options a la Taleb).  It is probably more accurately described as a robust approach.

But in relative terms it is interesting to see that most of DM's outperformance comes from avoiding the worst of bear markets.  In this way it is truly "antifragile" since it greatly outperforms buy and hold investing in direct proportion to the number of black swan events/bear markets.

So maybe the most accurate description of DM's historical performance is that it has been "absolutely robust," and "relatively antifragile!"

[shawster]

One more point about harnessing the concept of anti-fragility in terms of investment strategies.

Much of my attraction to dual momentum was born from my search for an anti fragile portfolio.

Dual momentum performs at its best by avoiding large drawdowns (black swan events) . In this way it is antifragile: it benefits from randomness.

I am very interested in the dual momentum strategy and looked through your article on the subject. I am doubtful that the CAGR will remain what it is going forward, but even if it's lower, it does reduce the frequency and amplitude of the negative returns, which I find interesting.

I'm not sure that it's a true anti-fragile or black swan resistant portfolio in the sense of the books since you would have 100% of your money focused in a certain sector of the global market and would be susceptible to black swan events in those particular areas until you rotate out at the end of the month. However, it takes much less work to manage that portfolio than a true anti-fragile portfolio and I can't image you could have done significantly better over the last 20 years.

I suppose if you wanted to construct an anti-fragile, dual momentum type portfolio, you could buy long duration call options of the ETF currently recommended by the dual momentum methodology with the 10% of your portfolio that is to be the risky portion and keeping the rest in cash. Longer duration costs more but suffers less from time decay. The problem I see with this is that you can potentially get killed with cost spreads the of options I would use for the international and emerging markets. I have no experience with futures, but that might be a better option in this particular instance.

I agree that past being prologue, DM is unlikely to be a truly antifragile approach since it does not actually benefit greatly from randomness (like selling call options a la Taleb).  It is probably more accurately described as a robust approach.

But in relative terms it is interesting to see that most of DM's outperformance comes from avoiding the worst of bear markets.  In this way it is truly "antifragile" since it greatly outperforms buy and hold investing in direct proportion to the number of black swan events/bear markets.

So maybe the most accurate description of DM's historical performance is that it has been "absolutely robust," and "relatively antifragile!"

You've certainly convinced me that the DM strategy has historically been superior to the traditional buy-and-hold to the point that I've converted part of my retirement portfolio to follow this approach-thanks! I will plan to convert more following some additional research and finishing the book you referenced.
I admit part of this approach is appealing because I do like to have some active interaction with my portfolio on a regular basis and it is hard to stick to the straight buy-and-hold strategy forever-that's just the human in me.

Back to the book discussion: there seems to be a lot of similarities between the anti-fragile life-style and the mustachian lifestyle-purposely enduring some hardship (fasting + exercise) to produce a stronger, anti-fragile person.

[laughing_paddler]

Back to the book discussion: there seems to be a lot of similarities between the anti-fragile life-style and the mustachian lifestyle-purposely enduring some hardship (fasting + exercise) to produce a stronger, anti-fragile person.

I'm in the middle of both listening to the Taleb and reading Irvine's Stoicism book and also appreciated some of the parallels between them. I'll read the linked review and maybe contribute some more thoughts as I finish the book (also- agreed on comments above re: Taleb's "i knew this before anyone else, me against the world, other people JUST DON'T GET IT, anti-snob snobbery" attitude. It simply OOZES out of the audiobook.)

[hodedofome]

If anything Taleb gets us to think, and to think hard about things we're not comfortable dealing with. I appreciate that about his books.

He is a bit of a Debbie downer however so you have to figure out what you will do in response to the new info, rather than just say 'well I suck as a rational human being so I might as well quit trying.'

[aceyou]

I play Daily Fantasy Sports as a source of income, and Taleb's Anti-Fragility ideas are the foundation of fantasy tournament strategy.  Most every day you lose(as the payouts are all at the top), and the only way to win long term is to construct an anti-fragile system where the unexpected happens when the highly owned players all suck, you are the won still standing with the correct combination of undervalued players few played. 

His ideas are critical for two reasons.  First, it gives you the mindset to seek out the value that will not be valued by the masses.  Second, it gives you the mindset to weather the daily grind of losing small amounts of your bankroll, where you maybe lose 25 days each month, but the other 5 days provide you with a huge payout that creates a large profit. 

[hodedofome]

Interesting application of his strategy, love it.


Sent from my iPhone using Tapatalk