James Altucher Interviews Nassim Taleb Part II


Yesterday I posted Part I in what looks like will be a three part post recapping and taking practical application from the recent podcast where James Altucher interviewed Nassim Taleb. Here is Part II

Some would argue that the lack of volatility, or variability, for much of the bull market, especially 2017 with an average VIX reading for the year below eleven, will lead to an unhealthy outcome. Healthy markets the argument goes, have modest pullbacks now and then as they work higher, and as mentioned they occasionally go down a lot, all as part of a normal and arguably healthy stock market cycle. This makes an argument that the domestic equity market is now very fragile relative to its own history. I don’t know if it is, but is a logical question if you give Taleb credit for being onto something with the concept of fragility.

Further to the point of variability, Taleb said that people who try to control variability in their portfolio tend to blow up. This has many incidences of truth ranging from the concept of portfolio insurance that is attributed to being a major contributor to the crash of 1987, the blow up at Long Term Capital in 1998, various other hedge fund blow ups since. While there is certainly something to this, as Karl Popper said, it only takes one negative to disprove a theory. A useable takeaway from this part of the podcast is to understand that volatility and down drafts are normal, once the market declines, it comes back with the only variability being how long it takes. Here though the context is simple equity and fixed income markets participation, not exotic derivative strategies and other complicated investment processes that tend to be prevalent in hedge funds. I could see risk parity being mishandled and causing a blow up. This would be most likely to occur to a fund extremely leveraged in fixed income only to then have a huge spike in interest rates.

Again though, there is a takeaway for keeping things simple and realizing at times your portfolio might go down a lot and that you should not panic. I would argue this does not have to be a source of fragility for anyone with a proper asset allocation for their circumstance and the wherewithal to not panic sell.

Taleb and James both had interesting thoughts on the fragility of an employee of a company being subject to whims of the person above them or vulnerable if the company fails. While this is in some part true, I believe that people can play a role in determining how fragile they are. If your mortgage and two car payments add up to 2/3rd of your take home pay then clearly you’re more fragile than the person who lives comfortably and happily below their means with less house than they can afford and driving their cars longer.

Zooming out a little bit, my wife and I built our lives to be antifragile long before Taleb went public with the term. I have talked about this as realizing what my stressors are. Taleb says shorter term stressors, challenges really, can be healthy and productive, but that we should avoid chronic stressors. You never know when some sort of external, financial shock might come along but I figured out early on that it was a priority for me to not be in a position of getting in real trouble when such an event came along. I got laid off from Charles Schwab in 2001. I could see the writing on the wall and started war-chesting early on and that war chest combined with my severance would have lasted a couple of years if we had needed it to. If my hand were somehow forced today into some sort of retirement unable to work, we’d probably be able to make it but with a much lower standard of living. For me, being able to avoid that sort of stress is very empowering and makes life much easier.