Taleb's 3 Financial Rules
Figure Out Asymmetries
Nassim Taleb is probably one of the most peaceful sleepers in the world. He is an investor, essayist, and mathematician who bet on a black swan and today has a net worth of over $100M.
In 1987 he bet with small asymmetric investments against the currency exchange rate, and thanks to black Monday, he made a fortune that allowed him to live without having to go back to work until today.
Later, in 2006-2007, he published his famous black-swan book. In this book, he criticized the indebtedness of the main central banks and how this indebtedness was going to end in one of the biggest recessions ever seen in history.
Said and done, in 2008, that recession occurred. Many say that what was really a black swan was his book and that there really was a recession was pure coincidence. We will never know.
What is certain is that last year, rereading the book, in the last chapters, he hints at how plausible it is in today's society to be exposed to a global pandemic and how, in the global world we live in, a pandemic could paralyze all production lines in just a few weeks.
Perhaps, it is too much of a coincidence that both events occur with such a close similarity to what is predicted in his book. Perhaps Taleb is a person who has a sufficiently broad mental clarity to know that the important thing in the world of finance is not to lose money and, from there, to look at the asymmetries.
A couple of weeks ago, he left what he considers the three essential pillars of being a good investor on social networks.
Today we want to give our point of view on how we interpret each of these pillars from Nassim's point of view.
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We live in a world plagued by noise. Thousands of news invade us on a daily basis. We must be very critical in believing everything we read in the media and social networks. In fact, most of the things we read are tremendously biased to what we want to hear.
For example, if you are a fan of decentralized finance or cryptocurrencies, you will notice how most of your social media accounts will also be in favor of cryptocurrencies.
This last example causes us to reinforce our initial thought. The same thing happens in politics and many other aspects of life.
We must be very critical of everything. Try to destroy any first judgments first and read the opposing views.
Once we have a fully global view, we will be able to make a judgment.
In the case of most investors, when choosing stocks, what they do is the following: I choose company A because it has a 120% YoY growth. Day by day, I read the reports, tweets, results, etc. After a year, it reports higher growth, but the share price decreases. Why is that? Because you have spent a whole year listening to the judgment of those people who are in favor of this stock, and you are feeding back your eagerness for company A.
We do the same exercise in our portfolio, which is the process we have been doing since the beginning, which is why our performance has been better yearly than the indexes. First, we make an asset allocation, and from there, we try to destroy our portfolio.
If we think it has weaknesses, we adjust it.
Figure Out Asymmetries
Success in the stock market can only be achieved if you make asymmetric bets. You can:
Invest all your wealth in a microcap and hope that it will become the next Amazon ten years from now.
You can leverage yourself for 30 in Bitcoin.
You can buy very OTM options at very low prices and wait for a very unlikely event to happen while having 60% of your wealth in low-risk assets.
Undoubtedly among all the options to succeed in the stock market, we go with the last one.
We are very close to stagflation, and the markets will start to fall sharply when it happens.
As of today, economic growth has already slowed. Inflation is at 40-year highs, and unemployment is the only thing that has not started to grow.
When this happens, we can be prepared because we will cascade into an even more negative scenario.
Never talk to idiots.
In this third pillar, we would add never talk to or read them. If you are here, you probably already have this pillar under control. Not because we are not idiots, which maybe sometimes we are. But because we don't promise things, we won't deliver. We could promise you a daily return of 3%, but we would be lying to you.
We can promise you that we have a portfolio with a Sharpe ratio infinitely lower than the markets, that we have an alpha versus the markets year after year, and that the day a black swan happens, which it will, we are going to benefit a lot.
The day this black swan happens, more than one of our followers will surely retire or at least be able to live much more peacefully for the rest of their days.
Besides, we have always shown total transparency and skin in the game.
If we have been wrong, we have said so, and this philosophy will remain intact.
You are on time if you want to jump on the bandwagon of those who promise other things they cannot deliver. If you do that, don't expect asymmetric returns.
On Sunday, we will write to you again with our portfolio.