Views on Life & on Equity Investing

Wonder, Wealth & Abundance

Black Swan by Nassim Nicholas Taleb

with 15 comments

Extreme events are more likely than we think. Taleb calls these “Black Swans” after the certainty, based on northern hemisphere experience, that all swans were white. Black swan events are high impact, surprising, and post occurrence appear expected.

Many examples he discusses are the start of World War I, the sales of the Harry Potter novels, and a turkey who spends a thousand days being well fed before being killed on the thousand-and-first day, rise of google. Negative black swans occur suddenly and positive relatively far longer. Same as destruction vs construction.

Taleb looks at some of the features of human psychology that make us poor at evaluating uncertainties and risks: confirmation biases, attraction to narrative explanations, epistemic arrogance, and tunneling. Other fundamental difficulties come from silent evidence, the general “problem of induction”, and the nature of historical causation.

Taleb presents his ideas largely through narrative, anecdotes, and even a few fictional stories. This is a reasonable approach to presenting what is essentially a pragmatic way of looking at the world rather than any kind of formal system. One wonders, however, whether Taleb himself hasn’t fallen victim to some of the very problems he raises — confirmation bias, attraction to narrative, and so forth. He also draws on the scientific and philosophical literature, drawing on a range of disciplines and sources, but doesn’t go into any of it in depth.

Taleb is a quantitative analyst or “quant” himself and a hedge-fund manager, but he doesn’t focus on finance in this book. His brief investment suggestion is a “barbell” portfolio, with 85 or 90 percent in Treasury Bills, as a defence against extreme negative events, and the rest spread across highly speculative investments such as small biotech companies, to try to catch a few extreme positive events.I have also learnt that he like to buy put options at the cusp of major changes.

In his opening example of a Black Swan, is the civil war in Lebanon which disrupted his childhood, and most of his other anecdotes are also taken from his own experiences. Taleb has a high opinion of himself and a few other figures such as Hayek, Popper, Montaigne and Sextus Empiricus come in for praise. He loves a lot of people and institutions cop a hammering at his hands, from individual philosophers, bureaucrats and politicians to institutions, governments and academia generally. He dislikes Nobel Prizes and the Nobel Committee.

Taleb has very strong opinions and some people may not like that fact. I would recommend that the book is read for entertainment with learned stories.

The book also covers examples of banks losing out everything they built for the past 100s of years in 1982 due to loans to bankrupt latin american economies, yet again in 1980 to early 1990s in Savings and Loan crisis. We have fresh memories of 2008. In all instances Govt. had to step in with tax payers money. I have personally lost 100% of my equity portfolio in banking crisis, which makes me believe now that Banks are an absolute SUCKERS BUSINESS. With no possibility of forecasting, complex structures, un ascertainable loans. On the face of it banks can grow for 20%+ for very very long periods of time unlike a shoe manufacturer for example, but they can go to Zero any fine day without giving a hint.

Every 10-15 years banks have to be bailed out under too big to fail pretext. You know that ‘too big to fail’ excuse is pulled off since Roman empire. Nevertheless, investors’ memories are very shortlived and they would go back again “when everything is normal”.

In my opinion Black Swan should be a foregone conclusion and a naturally accepted principle as we have neither understood an Atom, nor do we know everything about principles of working of a DNA, or even a small thing like insect. The forces that shape the world, rise and fall of technological landscape based on same fabric should itself be un predictable. Infact what we do know is that rate of change is increasing, therefore we are likely to have more positive and negative Black Swans in the years ahead that in the past. I agree with Taleb on the part the we are blinded with epistemic arrogance, I have heard people talk about ‘We know so much about the body, only brain remains to be explored’. Thats bunkum, absolutely rubbish. I do accept the advancement is being made, will be made more and more in years to come. But in no way can we put a finger on percentage of how much we know, while we are unaware of the scope of unknown. We may be only knowing 0.000000000000001% of all their is to know just in the field of biology but most people may be thinking around 40-80% range.

Person who acknowledges the thought ‘Human race is ignorant, and there is 99.99% unknown and so much more to know, that our knowledge is very limited’, is likely to explore and continue learning. Avoiding big mistakes is the only thing we need to do as successful investors, very little otherwise. Holding slightly above average companies for couple of decades snowballs into a very big fortune. There is no need to read science fiction, when reality itself is so interesting and mysterious.

Videos of Taleb

Taleb angry in 2008

Written by amitdipsite

November 26, 2010 at 11:03 pm

Posted in Uncategorized

15 Responses

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  1. This book could've been finshed in 10 pages.Nonetheless some very strong ideas.

    kudva

    November 27, 2010 at 3:45 pm

  2. @kudva,

    true🙂 , the guy has internalized the principle of 'sticking to core competence' by Buffett and does not come out of his specialisation. I could not read the whole book, so I played audio version and listened to interesting stories.

    Multibagger

    November 27, 2010 at 8:59 pm

  3. I had read this book in my college (days wen we learn all the platonic phony stuff)and ever since then was highly influenced by talebs book and i think its a must read for everyone irrespective of whether he is into businesses or any other field. ALso just check out some of the books from its bibliography and u will find some really great stuff to read.
    I was not sure whether his ideas could be applied to value investing becoz taleb might sometimes seem too paranoid and using his barbell strategy he is trying to profit from the black swans ( unknown unknowns) whereas being value investors we mostly try to find knowable information, understand the business,find some disconfirming evidence and then value it and buy at a discount for margin of safety. However by using the margin of safety we try to account to some extent for black swans and unknown events and ofcourse sometimes avoidable mistakes and offset the risk to some extent.

    sandy

    November 28, 2010 at 2:41 pm

  4. thats right sandy, we all love different aspects and our needs keep evolving. Taleb's or Popper's needs are to correct people's perception of reality, they love sticking to that all the time.

    there isn't much in terms of investment insight to take advantage of, other that buying out-of-the-money put options and being aware of dangers at all times.

    Idea is not to become a turkey ourselves and be extremely risk averse. Economics is not a science, economists are not scientists, and will not be able to predict human behaviour, they have to accept demotion in their prospects, salary.

    Financial engineering has gone way way out of hand. Bonus system is corrupt, every bank should be nationalised, its not their money that is being channeled on which they get 0.5% or 2% commission. Givne that we know it's not happening, lets not become turkeys by investing in likes of HDFC or Yes bank coz come 2020 and we will can potentially see wipe outs of these guys too.

    When people mention 'financial markets are innovative', laws lag markets, and tend to fix last problem than being forward looking, they are dolts, 'financial markets do not need to be innovative'.

    Think over – How many Indian citizens “need” options on Steel companies in 2011. I agree with Munger, when has says 'I'd make Volcker look like a sissy.'

    Multibagger

    November 28, 2010 at 11:15 pm

  5. I dont agree that the banks should be nationalised infact it is only because of govt interference in the economy the US economy is in such a mess in the first place, the rest of the bonus system, ccorruption and other issues with the system are just side effects of govt interference. This whole crisis is a consequence of the FED's cheap money policy and no one complains about that. As far as financial innovations are concerned we should not ignore that these instruments do help to deal with risk management and so they cannot be completely abolished.I am a free market capitalist and dont beleive that govt interference should be allowed and if you allow it then be ready to face such consequences. Before every financial crisis u will obeserve that it is preceded by govt interfernce in the economy in the form of cheap money aand after a crisis everyone makes the capitalist system a scapegoat and blames it for every flaw in the system. Now this time financial innovations are blamed for this debacle but no one looks at wat were the incentives for such behavior. The only thing govt can do is stay away from the economy and stop manipulating interest rates.
    As ben graham once said “It is not always the bad idea that gets you into trouble but sometimes good ideas stretched too far”

    sandy

    November 29, 2010 at 3:38 pm

  6. nationalisation of banks, while i agree with you that is may not solve the problems, just as nationalisation of railways, schools also has failed to deliver results in many parts of the world. even though Mrs Gandhi went for former option in India.

    I have to agree to disgree on other aspects such as, On derivates, individual selling britannia biscuits in a pastry shop in delhi does not need to buy derivatives on steel. convince me and he can buy, for ex. he needs to build a house next year and buy steel. I would stop all speculation, all margin trading, all lotteries (many indian state govt. have already), all lottos (people are addicted to bad habits like gambling, so maybe i cant help them), all casinos, there should not be a way to bet upto 10 million $ with 1 million $ in your pocket, Munger, and I agree with him would kill that. Perhaps it becomes a question like cigarette smoking, cancerous but in democracy we cant stop. So, we will impose so huge taxes on leverage that it will make it unattractive to use it for ordinary people/organisations without reason.

    I would prevent manager of a mutual fund with 20 billion $ in assets earn 200 million $ (1%) in commissions.

    An examples is, you have two finest brains of our times opposing derivatives, as long term loss but short term beneficial activity. Even though they oppose, they cant resist taking advantage of stupidity and mis pricing and end up buying them.

    I am aware that it won't happen, some wishes don't materialise so soon or in our lifetime, so I will avoid becoming a turkey.

    Multibagger

    November 29, 2010 at 6:24 pm

  7. My quotation on Leverage:
    —————————

    Leverage provides one the thrill of driving at 200 miles an hour, while one may reach the destination sooner on daily basis, payoff is only once every few years, rest to broken bones, unless ofcourse rest is permanent.

    Multibagger

    November 30, 2010 at 7:22 pm

  8. I love these two new products, posted on Elinchrom website on 29th of November 10:
    ———————————————–
    http://www.elinchrom.ch/news.php

    Excellent move, more tripod line.

    http://www.elinchrom.ch/products.php?p_id=237#content

    Most photogs use Photoshop to give final touches to images using laptop/ipad.

    http://www.elinchrom.ch/products.php?cat=8

    Multibagger

    December 1, 2010 at 7:29 am

  9. Fake Users:
    ————–

    I have no idea who these users are 'dnpatel77' et al are. On google search I found some folks have written information from my blog. for example this person is pretending to be myself.

    http://mmb.moneycontrol.com/india/messageboardblog/message_thread/3396835/5196835#m5196835

    I have no need to popularise my blog and earn money by cheap publicity. If and when I really need to, I'd start a Mutual Fund or Private Partnership in earnest fashion and advertise in financial publications on and off Web.

    Why would an average person with modicum on common sense advertise with tawdry trumpery which is unlikely to build reputation.

    Multibagger

    December 2, 2010 at 12:12 am

  10. Dear Amit,
    New products lists is really exciting. A bright future for PhotoQuip!!
    I could not research who they are operating, I mean direct sell, E-Commerce, Franchise Model?

    Keep posting, Amit!!!

    Regards

    Rahul Kumar Paliwal

    December 2, 2010 at 3:43 am

  11. Dear Rahul,

    They have preferred vendors in each country.

    Checkout distributors on this page

    http://elinchrom.com/distrib.php

    select dropdown list labelled “Find distributors in your country : “

    These preferred vendors use their brick and mortar shops and online media to sell for example, on this site one of their preferred vendor sells. There is need for after sales service, repair too.

    http://au.shopping.com/elinchrom/products?CLT=SCH

    or here

    http://www4.shopping.com/elinchrom/products?CLT=SCH

    There is also second hand market, through ebay etc. which anyone can do.

    Why I like these products is coz these type of products do not attract rapid technological obsolescence and market is not in 10s of thousands of units but millions of units. There are more players though.

    Regards

    Multibagger

    December 2, 2010 at 4:09 am

  12. Dear All Blog Readers: I want to put my thoughts on topic “fake users”. I really got hearted. I do not know why people behave in this way? I know one person who is writing big books, talk Big about Market n Philosophy, but end of the day selling garbage and biased stocks reports, started a garbage PMS and one of my educated/informed friend got trapped. They passed entire bull phase in last 6 months sitting on Cash and when my friend asked for Money back recently, they bought Liquid ETF. Now closing their PMS and selling it…

    My point is people admire on this type of people but People like Amit/Saroj Patni-ji who are putting their hard effort, precious time, knowledge to let unaware retails investors (people like me) know about fantastic businesses free of cost, they are getting this type of comments! And What Amit is expecting? An optional humble request to donate few bucks to an NGO? Is is not a great Value deal?

    Ok, Let Amit start writing post as “Potential Multibagger, to BUY report, pay Rs. 5000/ only”, then we would be Happy, right? And will BUY reports.

    What problem actually I found is, its human nature. Free things like AIR, WATER, LOVE Of Our Parents, INNOCENCE..We do not care about these invaluable things. See how we killed/polluted these gifts of existence.

    And I am not defending Amit, because pain is mine. i too found people behaving like this.

    Amit clearly mentioned everything, disclosed his interests and holdings, mentioned “Feel free to ignore my opinion”.
    What else any transparency one can expect?

    Hope everybody will support Amit and together We will explore potential wealth creating opportunities.

    Happy Investing & Exploring!!
    Regards to all retails Investor who are fighting for next Freedom.

    “Mails from “dnpatel77”, “We know, Who is this dnpatel77” …What does this type of conversation prove?

    Rahul Kumar Paliwal

    December 2, 2010 at 4:17 am

  13. Thanks for your support, I appreciate it.

    I really do not feel anything, neither hurt not betrayed. It was only meant as a clarification.
    There are 9996 supportive people for 4 unsupportive.

    Multibagger

    December 2, 2010 at 7:08 am

  14. Agreed and appreciated.I have also done some shop hunting in the Kolkata market to guage the poularity of Elinchrom.In Kolkata, there are many shops on photographic equipments on the back side of the Metro cinema.On enquiry I was surprised to know that the annual sales photographic equipments runs in crores (3 crores for 3 leading shopsthere taken together). The Elinchrome products constitute about 25% of this market share. The sale of Elinchrome equipments has increased by 50% in last one year and this year also it is more.
    Right now I am in Pune . I will try to assess the market size here also. One more thing .75% market is dominated by local manufacturers such as “simplex” brand .The cost differential in Simplex and Elinchrom is more than 40% .

    pankaj96

    December 3, 2010 at 4:40 pm

  15. Thanks Pankaj for your efforts and comments. Is Metro Cinema close to Lighthouse and New Empire somewhere on Kolkata ?

    Thanks again for finding out from the actual retailers.

    I could not find out who manufacturers “Simplex”. Personally I believe the competetion is with Chinese companies going forward not European, US, or others.

    I have simply suggested management to introduce a new brand to take share from Chinese products globally. I expect them to know better than me in any case. Elinchrom is as popular Swiss 'Swatch' watch amongst Photographers, Photoquip is still screaming at me from terminal in undervaluation. People respect the brand and Swissness, I will write a post on Swiss brands sometime.

    I should write a post sometime on disproportionate Swiss brands per population ratio for Switzerland, UBS, Rolex watch, Sulzer, Swatch watch, Swiss Re, Nestle/Nescafe, ABB, Novartis, Sulzer, Adecco, Ciba Geigy, Credit Suisse – CSFB, Kuhne & Nagel – world's biggest shipping company, Holcim (21 Billion $ manufacturing, I think it owns ACC cement in India), Logitech computer devices, Lindt chocholates, Sandoz, Schindler escalators/elevators, Chopard watch, Longines, Tissot Watch, Omega watch, Tag Heuer watch,Rado, Davidoff, Victorinox – swiss army knife, 50 billion $ Roche Pharma, 152 Billion $ Glencore, Patek Phillipe, etc.. this is what I remember.

    There is something about their culture, German influence. And then something I we had never heard of as laymen, Broncolor and Elinchrom are top two brands globally in their segment, both Swiss. Should study on how this country of 77 lac population has so many multi billion $ corporations and so many brands. You can maybe name 1 or two brands from countries of equivalent size in Europe, like Nokia from Finland, buts thats the end for Finland. I can't name one such global brand from NZ.

    Keep us updated with your research in Pune.

    Multibagger

    December 3, 2010 at 8:52 pm


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