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Nassim Taleb Explains The One Thing An Investor Should Never Fail To Do
Authored by Nassim Taleb via Absolute Return,
Uncertainty should not bother you. We may not be able to forecast when a bridge will break, but we can identify which ones are faulty and poorly built. We can assess vulnerability. And today the financial bridges across the world are very vulnerable. Politicians prescribe ever larger doses of pain killer in the form of financial bailouts, which consists in curing debt with debt, like curing an addiction with an addiction, that is to say it is not a cure. This cycle will end, like it always does, spectacularly.
When it comes to investing in this environment, my colleague Mark Spitznagel articulated it well: investors are left with a simple choice between chasing stocks that have an increasing chance of a crash or missing out on continued policy effects in the short term. Incorporating a tail hedge minimizes the risk in the tail, allowing investors to remain invested over time without risking ruin. Spitznagel put together a video explaining the point.
To be robust, one must construct a portfolio as an engineer would a bridge and ask what your managers expect to lose should the market fall by 10%. Then ask them again what they’d expect to lose in the down 20% scenario. If that second number is more than two times more painful emotionally than the first, your portfolio is fragile. To fix the problem, add components to your portfolio that make the portfolio stronger in a crash, like actively managed put options. You will be able to build stronger, better bridges, with better returns, that will last for the long term.
By clipping the tail, you can own more risk, the good type of risk: upside with limited downside. And rather than helplessly watching your bridge collapse, you can be opportunistic in a crash, and take the pieces from others at bargain prices to increase the size of yours.
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The Health of the state is WAR. When US politicians speak their lies is to cover the fact that America has been at perpetual WAR since its creation. War may be the health of the state, but not of the economy.
https://biblicisminstitute.wordpress.com/2015/06/25/warmongering-vs-econ...
The one thing investors should have done - was to ignore Nassim for the past 5 years!
For example, he advised "every human being" to short U.S. Treasuries. He should stay in his robust wine cellar and explain things to the ghosts of his readers.
The one thing an Investor should do is NEVER , EVER, have a stock broker.
Unless they enjoy anal sex.
Catching that is.
Taleb is a very smart guy. His strategy would certainly not be to simply sell short some treasdury future. rather, buying ltm deep out of the money options that would explode IF treasuries were to crash. While expiring worthless if nothing really bad happens.
If you can identify genuine (i.e. really working) 20:1, 30:1 payout-hedges you can easily risk .5-2 % of your portfolio on them. They may cost you a tiny bit for a couple of years. But they will save you when things falls apart.
The Health of the state is WAR.
War is the health of the BANKS.
For a guy (JC_BI) with three weeks you sure spend a lot of time trying to be first poster, and that link to your blog is in every post. You're not trying to shill your blog are you?
#41
I'm trying to build a fallout shelter and this dude wants me to drop everything and put on some puts....the nerve.
Can we now agree that Nassim is race baiting with the whole `black` swan thing?
I like to walk. Walk and think.
yes. agreed.
fortunately, i have a spouse who also gets this, so i don't take flak for not chasing unicorns and rainbows....but i suspect that others have issues here.
The one thing all these clowns seem to forget is that in the event of a collapse it is highly unlikely that the other side of any bet will be honoured by those that will have nothing to cough up but blood'.
"To be Corzined"
Exactly.
Lady C wanted me to place some options, but I bought her off with a new Steuben saddle.
That will alway be worth money if looked after.
Lady C should be most appreciative of her situation. Had I asked for such a thing the response would be " Have you gone completely insane? Perhaps it's a brain tumor."
Miffed;-)
Dear Miffed, To your lament on "Yak piss" and reluctance to venture out on foot in the community for alternatives, in a previous post, I humbly offer this solution: Google: via ready brew amazon
Enjoy.
Thank you. I have also ventured down this path. Mr always brews a delightful cup for me in the AM and serves it to me in the shower ( I am no morning person. He prefers me on dayshift so this was the deal) but a cup in the afternoon begs and I am spoiled. Recently, I tried a raw coconut water infused with coffee I am partial to but it is quite expensive so I have faced this must be a treat. You idea is most welcome and if you have a personal recommendation I would love to hear it.
Miffed;-)
You are most welcome. I used to go overboard selecting, storing and grinding beans at home for a decent cup. And what to do when out and about? So I researched and tested what critics opinions were and tried many.
Most failed.
This stuff (Via Ready Brew) is so good that I now use it exclusively. No more grinding. No more storing beans. Quick and very satisfying. A little portable foil packed emptied into hot or cold water. Great technology. ~$0.50 a cup - Amazon delivers it to my door. I retired my camping hand grinder & the electric adjustable kitchen grinder now just gathers dust.
(I prefer the "Bulletproof" coffee protocol, VRB + MCT oil + Ghee - blended) I use Brain Octain MCTs and Ancient Organics Ghee (pricy) but unsalted Kerrygold butter is just fine as an alternative for the Ghee. You may appreciate the chemistry.
I am 73 & been searching for quite a while. Used to live on Landis St. in SD - 2 blocks north of Balboa Park. The hound loved running there.
I had never heard of the Bulletprooof protocol so I have spent my morning researching it. Fascinating! It is similar to my own life style which is mostly Paleo ( no wheat, soy, pasteurized dairy, limited sprouted grain, wild fish, home raised meat). We use Ghee from Jerseys, coconut oil, locally made avocado oil and local olive oil ( so much commercial is is adulterated)
I decided to spend some money on his Bulletproof coffee Protocol as a treat. Then I will switch to your method because my budget is tight. I am determined keeping my cognitive abilities top notch. I am fortunate my family has no Alzheimer's or significant brain decline in their later years but our society seems to be showing more and more decline in younger years. My leanings are toward an environmental cause. I also use a tincture of Lions Mane, Shizandra and Celestrus which does help my mental focus.
Thanks so much for introducing me to this! My restless mind is always searching for new possibilities in this arena.
Miffed;-)
;-) oh gosh ... now I get to research tinctures - thanks! And mostly Paleo (I include RS - resistant starch) https://www.youtube.com/watch?v=NI3KtR3LoqM along with aryuvedic goodies seems to work and have worked well for me.
This is the latest of all things wonderful that actually make sense and benefit. http://www.elixa-probiotic.com
I make the Shizandra and Celastrus tincture myself. If you are interested, email me at zhmiffed at gmail dot com. It's pretty straight forward. I found it the cheapest way to go.
Miffed
Lady C makes a lot of money with her horses.Training other riders, and bringing on/schooling
difficult ones.I'd swear she could get a donkey to passage and piaff in a few days.
So my motive is not exactly pure, but it keeps her happy, and therefore me happy.
She does flatwork in a Steuben ? I can think of a lot of better saddles than that!
Then genius, what's your alternatiove - other than hunkering down in some shelter in a forest for the next 20-30 years? And while doing so, do you hope or rather fear that you are wrong?
In other words, at a time when certain paper financial promises are not being kept, make other paper financial promises in the HOPE that they will be kept. Sure glad I'm not payin' for financial advice.
BTFD until you see those mushroom clouds.
Sounds like you can never lose. Imagine that suckers.
Thanks! for the ad Nassim, you slipped that sucker right past my adblocker slicker than black swan squirts.
I do this instinctively. Right now, my family's money is 45% stocks, 45% government bonds, 8% cash and 2% gold. It was 60% stocks 18 months ago. I might drop to 35% stocks very soon. At this point with historic valuations high and money cheap, the downside risk increasingly is not worth the tradeoff of more gains. If I had real guts I would drop to even lower stock positions than that.
You may as well be discussing voting R or D...just a ridiculous non-distinction any longer between paper bonds and paper stocks and paper gold and paper money...red thread of fraud holds them together and all will rise and/or crash together.
Nowhere to run to, nowhere to hide...Only option left is to invest with the "state" or against it. Choose wisely...as if your life depended on it.
This is not anti fragile. For example, a possible tail risk is a sudden rise in yields. Both stocks and bonds take it on the chin - thats 90% of your "wealth" completely exposed. Moreover, what does "very soon" mean? thats what everybody says, just before it crashes and they're done. I'm not saying the market can't continue to rise - i think it probably will, however, your current composition/mix of networth is not immune to tail risk, where the expected value of loss is minimized, unless you are hedged with some out of the money puts (stocks), and your bonds are short duration.
ones and zeros
Excellent video, easy to follow - and makes perfect sense!
Imagine that if in advance you knew that the tail hedge was going to be a sure winner. What would you do then?
that's some good, practical advice right there - "clip yer fuckin' tail!"
Okay, is there anything new under the sun? The Fed has created trillions of $ to prevent, or at least delay, a total collapse. They want to do a couple of tiny rate hikes late this year, so they have room to cut again when it all falls apart. It won’t work…once 95 million “investors” (lemmings) get scared, more QE will only be an admission the Fed has failed and it is about to get real ugly. That exit door is oh so small when the panic selling starts. The wealthy get out first and leave the fools to hang on until they lose it all.
The bankers have pushed demand forward in an effort to re-inflate the housing and equity bubbles. People are bidding up houses using low-qual loans and buying vehicles with eight or more year notes. Where have we seen all this before? It works, until it doesn’t, then it all comes crashing down. China will see riots if they don’t get the stupid Americans to borrow money and buy more of their crap. A deflationary depression is right around the corner as people cut back on spending.
Within five years every fast food joint will be fully automated…driven by mandatory wage hikes. No more summer jobs for teens, or jobs for illegals. Does anyone really believe they need to be asked to take their order? A machine can cook fast food just as well as a person. Use your smartphone to order and pay and the burgers and fries drop down a chute when you get there. A few touch screens for dine-in patrons.
The debt-driven party to hide the ugly truth, is about over.
We continue to move in the direction of the final shakedown which has the potential to be very uncontrolled. Let the chips fall where they may is a figure of speech which means, "What happens happens" or "Let the imminent events unfold." This metaphoric term dates back to the 1800s and alludes to chopping wood. However, several factors determine just how much influence can be applied to the the final outcome of current economic policies.
Using the metaphor of "falling chips." Things like the size of the chips, the rate or speed at which they fall, and the number of chips in the air may make them uncontrollable. In my opinion luck and caution will impact our individual fortunes as we move through the financially violent period before us. Below are more thoughts concerning the idea our economic overlords have lost control of the game.
http://brucewilds.blogspot.com/2015/08/the-final-shakedown-will-be-uncontrolled.html
Haven't seen a bridge made of paper. I'll stick with metal.