I'd Rather Be Dumb And Antifragile, Than Smart And Fragile
We live exposed to a world full of uncertainty from which we can draw strength.
The markets are currently marked by uncertainty: rate hikes, tapering, inflation, the war in Ukraine, etc.
These last few weeks have been marked by colossal volatility and high volume in the major indices.
A few whales are starting to load up their hedge portfolio. We know this because the CBOE Index Put/Call Ratio is at last year’s lows.
Markets are marked by uncertainty and irrationality in the short term, and that is why it is necessary to have an asymmetric portfolio that benefits from the uncertain. This principle of antifragility allows us to face the unknown, do things often without understanding them, and do them well.
Taleb has consistently argued that even when we use antifragility, we are better than when we think, and he is not wrong.
But what is antifragility? Antifragility is an event by which a system becomes more robust to stressors. When we look for the opposite of fragile, we find terms like robust, but robust does not become more complicated to break in the face of stressors. Antifragile does.
Everything around us that benefits from stressors are antifragile. We can find many examples in everything around us: the stock market, our body, our nutrition (it seems that diabetes and Alzheimer’s are primarily due to a lack of randomness in feeding ourselves and the absence of the stressor of going hungry from time to time; “Tools of Titans” — Tim Ferris).
When we go to the gym and do heavy lifting, we put a stressor into the muscle to make it stronger.
In short, anything that benefits more than it harms from random events will be antifragile and otherwise fragile.
Applied to investment
Economists go through a curious process by trying to explain random events by looking backward. They try to explain what happens in the markets and back it up using useless theories that become obsolete when an unexpected event is not contemplated in the model. This is known as a black swan.
Thus, everything that has not happened, or they do not understand, cannot occur. This is the case of Long-Term Capital Management, a hedge fund created by Nobel laureates who subjected their portfolio to enormous leverage based on the past and not on the uncertainty of the markets.
Long-Term Capital lost far more money than they had, even going so far as to reclaim money from the fund’s investors.
Simplicity above all else
The famous KISS rule came (Keep It Simple, St****). We tend to delegate our money to investment professionals who often have complex models to justify their profession and abusive commissions. With Decentralized Finance (DeFi), we will see how many of these professions will be the first to fall.
Today, you can find better investment theses in Seeking Alpha than you can find in any analyst of a US HF.
It is essential that every investor know their risk profile, be sufficiently informed, and know the different investment alternatives. Once this analysis is done, he must create a set of simple rules that make his investment style simple and easy to implement so that he can obtain good returns in the long term.
How to apply antifragility
There is no one correct answer. There are several alternatives. Following the principle of simplicity, two stand out above the rest.
One of the simplest ways to invest with a higher return would have been periodic contributions to Bitcoin. It is not a currency, nor is it a store of value; it is a technology that makes our lives easier.
The end of the 19th century saw one of the most prosperous periods. There was the gold standard, and, of course, there were no central banks. This made the economy fairer, an economy of progress.
Today it is just the opposite. Countries like Argentina, El Salvador, etc., are exposed to devaluation. They are exposed to underestimating their currency due to abusive policies by their central banks.
In the global society in which we live today, where a virus can go around the world in just hours, it makes no sense to centralize the currency. This technology gives value, and that’s why it makes sense for it to persist.
Speaking of antifragility. There have been many governments and regulations that have tried to overthrow it. How many have succeeded? None.
We are talking about a technology that a few cannot control. That is why the great totalitarian leaders are afraid and tend to prohibit it. In countries like Russia and China, there are restrictions or illegal. However, when we look at the countries where most BTC is mined, we have:
Options allow you to have an uncorrelated portfolio and benefit from uncertainty. Having a simple process of buying and selling options with very OTM long gamma is simple to implement and gives a lot of robustness to any portfolio.
We assume that decorrelation with the rest of the market. This way, when it looks like all assets are weakening, we have enough cash to buy them cheaper and vice versa.
The mix of both principles is precisely what we try to implement at Asymmetric Finance. We have a portfolio where we bid for progress for anti-fragile assets, and we have simple rules that make us benefit from the inefficiencies of the markets.