Nassim Taleb on being called an Idiot

Sometime back, one of my friends told me that my blog does not have enough 'actionable' posts. What he'd meant was that I should have more posts which the readers can use for trading purposes. Today, I read a post in Infectious Greed which dealt with a speech given by Nassim Taleb at University of Pennsylvania (here). Nassim, as most of you may know, is the guy who came out with the Black Swan theory which explained:

1. The disproportionate role of high-impact, hard to predict, and rare events that are beyond the realm of normal expectations in history, science, finance and technology

2. The non-computability of the probability of the consequential rare events using scientific methods (owing to the very nature of small probabilities)

3. The psychological biases that make people individually and collectively blind to uncertainty and unaware of the massive role of the rare event in historical affairs

Nassim Taleb at U Penn:

People kept telling me I was an idiot for years [because] I didn’t invest in markets.

I don’t invest in the stock market because I think it’s a sucker’s game. I make my money and I put it in a repository [of value]. Or sometimes I just do these bets for entertainment, nothing else, so I can have a conversation with someone once in a while on a train or on a plane. That’s the only reason. So I stayed in cash, for years, and then realized that the value of my cash became monstrously high after the crisis. The last 12 years, the stock market did nothing, and cash yielded 40, 50, 60 percent.

Cash gives you an option when other people go bust. That’s what Kennedy did. Joe Kennedy, the father, got rich not from investments but from negative investments. In other words, he had no investment when other people were busted. [Take] the story of the two brothers [one of whom makes $4 per share a year while carrying no insurance against being wiped out, one of whom makes $2 per share with maximal insurance]. If the $2 brother can survive—without being kicked out by the board and replaced with some short-volatility fellow who doesn’t understand anti-fragility—then when the other brother goes bust, he’ll be able more aggressively to buy his inventory—his refrigerator, his car, everything, even his house—for nothing. You see the idea? So you have to think in terms of dynamics of cash: that it’s not a sissy trade.

There’s something called action bias. People think that doing something is necessary. Like in medicine and a lot of places. Like every time I have an MBA—except those from Wharton, because they know what’s going on!—they tell me, “Give me something actionable.” And when I was telling them, “Don’t sell out-of-the-money options,” when I give them negative advice, they don’t think it’s actionable. So they say, “Tell me what to do.” All these guys are bust. They don’t understand: you live long by not dying, you win in chess by not losing—by letting the other person lose. So negative investment is not a sissy strategy. It is an active one.

I do not agree with Nassim's speech in its entirety but I agree with some of what he said. For example, some investors would ask what to do with the money if they sell after the market has topped. The interest rate for FD is so low. I have no answer to such silly comments. In an uncertain time, we must worry less about return on your capital but more about return of your capital. If your money is invested in a declining asset, you would not get back your money in full. The phase that I like the most from Taleb's speech: you live long by not dying, you win in chess by not losing—by letting the other person lose.