James Altucher Interviews Nassim Taleb Part III

A few days ago, Nassim Taleb visited James Altucher for an hour-and-forty-minute podcast. It was a great conversation that offered all sorts of great blogging points. This is Part III (the final part) of my recapping of the podcast where I have tried to make their talking points usable for investing and life in general. (You can read Part I and Part II here.)

Taleb makes one point in passing that is interesting, saying that time is volatility, more events happen over a longer period of time. This started to gain traction as I remember it during the financial crisis. The standard belief was that with enough time, you will get bailed out of any bear markets or other adverse events. Then during the crisis, the notion of permanently impairing capital became a more mainstream concept. Most of what does people in in this context is behavioral mistakes. Someone who panic sells, misuses leverage, takes on more risk than they should or whatever is going to permanently impair their capital and time will only bail them out in terms of their starting over. Someone who was 50 in 2008, planning to retire at 65, who continued to put money away every paycheck has indeed been bailed out by time. Now at 59 this person may want to think a little more about sequence of returns and reduce their fragility in the face of when the next bear market starts. This creates an opportunity to actively manage fragility or vulnerability. This doesn’t require perfect execution to be successful, even middling success can bolster a retirement plan.

The hypothetical of the investor who was 50 in 2008 who was able to hang on and realize at 59 there is less of a chance for time to bail him out raises the idea of stoicism, which means to focus on things within your control. I read an article a while back about stoicism and realized I have long been a stoic, blogging often that things like savings rates, asset allocation decisions and not panicking as being far more within our control than how the market performs. Jeremy Grantham is on the record expecting a 3% average annualized return for the next ten years. If he turns out to be correct, that will include one or two very good years, one or three bad years with the others being very so-so. In the context of Taleb, you stoically bolster your anti-fragility by not squandering the one or two years that are good in that ten years and not panicking in a bad year. You could actually salvage a lost decade if there is a bear market that you can avoid the full brunt of by heeding some indicator like a breach of the 200 day moving average or an inverted yield curve.

Taleb talked freely about how he invests, and there are some interesting things to chew on if you know what to do. The point is not should you buy some tech stock before its earnings but philosophically how does he view risk, how does he allocate capital, what bigger picture factors drive his decision making. A funny side note, almost nine years ago, Taleb appeared on CNBC and Roben Farzad asked him what he should buy for his daughter’s college fund. I jumped on him right away for such a squandered opportunity and apparently I wasn’t the only one as he has since publicly lamented what a waste that was.

Taleb now considers himself to be very underinvested. He knows this is true because of how infrequently he checks his screens. If you check frequently, then you are overinvested. He mostly has cash which he says is antifragile but has risks from inflation and opportunity cost. He has some exposure to agriculture, presumably commodities, to hedge inflation, he has some real estate and some equity exposure, but he described all of that as small. He maintains a convex bet on a stock market crash, likely through Universal where a 10% drop doesn’t help but something larger than 20% would.

He maintains then a mix of very little volatility potential with most of his assets and extreme volatility with a small portion of his assets. This is consistent with being antifragile. It is also consistent with an idea of his that I have been writing about for years which is to put 90% into T-bills from various countries (very little volatility potential) and taking on a lot of risk and volatility with the remaining 10%. In terms of having figured himself out (important in life and investing) he said he does not own biotech because it is complicated, and he has a comfortable life that he doesn’t want to mess up. This is maybe a little inconsistent, but if there are segments of the market you’re better off not owning, then better that you figure that out without impairing your capital, permanently or otherwise.

In terms of fragile versus antifragile as related to things that benefit from volatility and the extent to which reward can outweigh risk, I think speculating on cryptocurrencies is antifragile when positioned correctly. Taleb talked about publishing companies, they risk small amounts of money on authors and every so often a book makes $100 million. So it is with taking a small position in something like Bitcoin (BITCOMP). There is a good chance with Bitcoin (fill in the name of just about any of the other cryptocurrencies of you like) of a very extreme outcome; it goes to $1 million like some people say or it goes to zero like others say. If I bought half a bitcoin right now for $7000 and it went to $1 million and I held on, then at $500,000 in my account, it would have a large, positive financial impact for my wife and me. If it went to zero, it would have no negative impact, it’s less than one Roth IRA contribution. I am a huge believer in the marijuana theme (haven’t figured out a good way in yet), but I don’t believe that a Bitcoin-like opportunity exists buying a stock or ETF; $6000 won’t become $500,000 unless I somehow take entrepreneurial risk.

Tying this all together, there are so many things that go into determining long term personal finance outcomes beyond what stocks and funds you buy. Understanding risks and behaviors, along with how markets function, are crucial and that is the value that someone like Taleb can offer.