4.09.2010

Investing like Nassim Taleb

George @ OnlineInvestingAI recently finished Taleb's first book called Fooled by Randomness. I was once again reminded of Taleb's trading strategies, and reminded myself to continue my own contrarian bent. I'm going to assume you know who Nassim Taleb is, and instead are curious how one might invest given this new strategy.

First a quick note. You need to look at all of you liquid assets as investable. Meaning, ideally you will want to calculate the percentages below against your total net worth -- not just simply money you can afford to lose.

The basic idea is to take 10%-20% of funds and buy out of the money options for pennies, and reap big when crazy events happen. Since you don't know when (and no one does) "Black Swans" will happen, you will slowly bleed money to the sellers of these options. The other 80% of your money place into the safest investments you can think of. Don't be so naive as to think US government debt is the way to go here. I would recommend (as would Taleb) buying government debt from several large and "safe" countries of your own choosing. You could try and diversify here, but if you've read Taleb's book(s), you'd simply be fooling yourself. If the US defaulted on there debt, who or what would be left in good shape? Don't misread me here. A US default is only a black swan away from occurring :-) The key is to try and minimize the risk on most of your money, while maximizing the risk on the invested 10-20%. When (not if) a black swan strikes again, you'll profit very nicely.

4 comments:

  1. Hi Nick,

    You make a good point, "A US default is only a black swan away from occurring". Black Swans are supposed to be impossible to predict, but I wonder if there are certain factors that increase the likelihood of them happening.

    For example, maybe they are caused by a massive shift in perception. So, if there is a shift in perception that the US will be able to repay its debt, then it seems plausible that Black Swan events will occur.

    Also, perhaps the increased speed of information and communication throughout the world makes them occur more often.

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  2. Great post, Nick. It gave me a lot to think about!
    It actually reminds me of a book I'm reading that ties information theory with, among other things, the market. Basically, you want to make probability your friend.
    And, from this point of view, black swans happen every day--just not on the apocalyptic scale that we witnessed.

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  3. I've read your post little bit later than should =) But anyway the idiea of book is clear. Problem is having no digital information about investing? How can you choose options? How many sigma do you use amd how do you analize the market? And so on... if you use that straregy can I ask you to comment it?

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