James Altucher Interviews Nassim Taleb Part I

A deep dive on the latest from Nassim Taleb and how to apply it practically in life and your portfolio.

James Altucher interviewed Nassim Taleb in a lengthy podcast that I delved into to try to extract useful ways to implement what they talked about. Please read on for Part 1 and check back later in the week for more!

Nassim Taleb sat with James Altucher for an hour and 40 minute podcast that covered a lot of ground, revealed a lot of interesting stuff and was very fun to listen to. As a preamble to this post, James and I have been acquaintances for many years, we overlapped at TheStreet.com and he mentioned my blog in one of his earlier books. We’ve maintained a minimal but steady contact through social media.

If you follow Taleb on social media then you know he is very plain spoken about who he dislikes; economists, political scientists, most journalists and generally people whom he perceives as not having skin in the game. Oddly, he has become something of an academic yet the people he seems to dislike are often thought of as being academics. Interestingly, he has a fondness for firefighters (Nassim, if this makes your radar, I’ve been a volunteer firefighter for 15 years).

Black Swan was the first Taleb book I read, shortly after it was published. I got a lot out of the book and have since sought out his content and appearances whenever I could. I have lamented in recent years the extent to which less and less of what he says (mostly through Twitter and Facebook) has anywhere near the value of what he used to say and write.

He addresses that issue in the podcast with James. He regrets how common the use of the black swan metaphor has become. He also does not like being cited by people who don’t understand what he actually means, that is misusing his observations and theories. He said he now writes in such a way that it is intended to be less accessible to the “common person.” This must
pertain to his social media posts as well, at least me anyway. Very few of them add any value.

Put another way, citing one of my favorite quotes from just about my favorite TV show of all time, Deadwood, Taleb is often having a conversation that most people cannot hear. That’s not so bad if you have the introspection to understand that and I hope I do. James does a great job in the podcast of getting Taleb to be understandable for most of the interview.

Much of the podcast is devoted to the concept of what is fragile versus what is antifragile and applying those ideas to many aspects of life not just investing.

The concept of fragility and antifragility is not easy to understand. The concept is about trying to define risk. There are certain risks that can have a great deal of variability and some risks that don’t. In the interview, Taleb says that whatever the risk is of falling off a ladder, it won’t double next year, there is a low variability. This is not the case in markets. Every so often the stock market goes down a lot but most of the time it doesn’t. It may not be that the risk of a large decline is variable (more on that in a second) but the timing of the consequence is variable. There is less risk of a large decline immediately after a large decline. Every year that goes by without a bear market is another year closer to the next bear market. So maybe the risk of a large decline is variable. Where this whole subject can be thought of in terms of probabilities there can be more than one answer which can be challenging.

In that last couple of sentences, I might be guilty of conflating the risk of an event, the probability of the event and the effect of
that event which is something else that came up in the podcast. A market crash is a bad thing but not for the person who owns out of the money puts. Taleb for many years has had an affiliation with Universa which is a hedge fund that buys out of the money puts waiting for the next calamity to occur in the market. It is hoped that the huge payoff from a crash would more than offset the losses of perpetually buying out of the money puts. This might be challenged after such a long bull run, maybe we’ll find out when the time comes, but in a cycle of a more normal duration it seems like a feasible idea even if it is unsuitable for individual investors.

A simple definition of fragile as relates to investing could be thought of as more downside than upside and while I would argue most investors don’t load up on things with more downside, there could a more of a spectrum to this. Some types of investments might be further out on the spectrum toward having more downside. The WisdomTree CBOE S&P 500 PutWrite ETF (PUTW) might be an example of something that approaches more downside for the reasons I hit on the other day. Selling puts now I think does have more downside now as opposed to after then next large decline. A trade or investment with more reward than risk, or at least on the other side of the spectrum as PUTW should arguably be sought out. Another definition of fragile that Taleb uses is that things that don’t like volatility are fragile which would appear at first glance to include all equities. This point is very debatable, do equities like volatility or dislike it? Earlier in the podcast Taleb goes into great detail about how important variability is in many things ranging from diet, to environmental conditions and just about everything else in terms of pursuing healthy outcomes. Too steady of a heartbeat even is a marker for mortality, he says. Obviously, you vary your heartrate by exercising regularly. So then is too little variability in equities unhealthy, he might say yes.

Please come back tomorrow for Part II

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