Category Archives: Investing

When Smart Investors Do Stupid Things

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The article closes by asking, “how long can they produce those kinds of returns before suffering some spectacular crash?”

We now know the answer: about a year.

LTCM was a glaring reminder that past volatility is a terrible measure of future risk. Yet we still obsess over volatility, convinced that it tells us how safe an investment is.

Nassim Taleb describes using volatility as a measure of risk as the “turkey problem.” He writes in his book Antifragile:

A turkey is fed for a thousand days by a butcher; every day confirms to its staff of analysts that butchers love turkeys “with increased statistical confidence.” The butcher will keep feeding the turkey until a few days before Thanksgiving. Then comes that day when it is really not a very good idea to be a turkey.

So if volatility isn’t a good measure of risk, what is?

via When Smart Investors Do Stupid Things.

Permanently “Risk-Off”

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Taleb writes: “Stifling natural fluctuations masks real problems, causing the explosions to be both delayed and more intense when they do take place. As with the flammable material accumulating on the forest floor in the absence of forest fires, problems hide in the absence of stressors, and the resulting cumulative harm can take on tragic proportions. And yet our economic policy makers have often aimed for maximum stability, even for eradicating the business cycle.

via http://www.valueinvestorinsight.com/pdfs/IssueTrialFE2013VII.PDF (pdf)
HatTip To… Apologies! I can’t find the email that sourced this article. But, Thanks!

No, Small Probabilities are Not ‘Attractive to Sell’: A Comment by Nassim Taleb :: SSRN

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No, Small Probabilities are Not ‘Attractive to Sell’: A Comment
Nassim Nicholas Taleb
NYU-Poly
January 5, 2013
Financial Analysts Journal, Forthcoming

Abstract: Owing to the convexity of the payoff of out-of-the money options, an extremely small probability of a large deviation unseen in past data justifies rationally buying them, or at least justifies excessive caution in not being exposed to them, particularly those options that are extremely nonlinear in response to market movement or changes in implied volatility. One needs, for instance, a minimum of 2000 years of stock market data to assert that some tail options are “expensive”. The paper presents errors in Ilmanen 2012, which provides an exhaustive list of all arguments in favor of selling insurance on small probability events. The paper goes beyond Ilmanen 2012 and suggests an approach to analyze the payoff and risks of options based on the nonlinearities in the tails.
Number of Pages in PDF File: 5
Download

via No, Small Probabilities are Not ‘Attractive to Sell’: A Comment by Nassim Taleb :: SSRN.

What I say is HERE and HERE ONLY

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This is the fact that should make sympathetic readers of Taleb pause: we have had at least two major global crises in recent years – the financial crisis in 2007-08 and the European banking crisis in 2011 – and yet the payoff to option buyers from those events has not even covered the carrying costs of the strategy in the last several years, much less the costs incurred from buying anti-fragility (option gamma) during the prior decade. It’s not just that options are not underpriced in light of “black swan” risks: they’re dramatically overpriced.

via Why Taleb is Wrong About Markets and Uncertainty | Condor Options.‏

@EpicureanDeal Excellent work. Highly recommended. RT @CondorOptions: Why Taleb is wrong about markets and uncertainty.
http://condoroptions.com/2012/11/26/why-taleb-is-wrong-about-markets-and-uncertainty/

@ModernistAlpha sorry,but this critique of Taleb’s prescriptive ideas is a straw man.Taleb opposes blind faith,not measurement

‏@nntaleb What I say is HERE and HERE ONLY. http://www.fooledbyrandomness.com/Ilmanen.pdf

via Nassim N. Taleb (nntaleb) on Twitter.

The rocky road to big gains that might not happen – FT.com

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Famed investment sage Warren Buffett, like many before him, decided to sell options. Veteran trader and renowned intellectual Nassim Taleb, on the other hand, decided to buy options. While Mr Buffett would have gone for the first choice in the game proposed at the beginning, Mr Taleb would have gone for the second choice.

So, are you a Warren or a Nassim?

In 1999, Mr Taleb founded Empirica hedge fund with his student Mark Spitznagel, with the mandate to bet on the improbable long odds market happenstance. Empirica made 57 per cent in 2000, then lost 8 per cent in 2001 and 13 per cent in 2002. It closed in 2005 and in 2007, Mr Spitznagel founded Universa hedge fund, with Mr Taleb as adviser. Universa returned 115 per cent in 2008 and 23 per cent in 2011 through August. It lost 4 per cent in 2009 and in 2010. Today, it is considered a leader in tail hedging strategies and its success together with the vindication of Mr Taleb’s philosophy by real world developments has spawned numerous imitators.

via The rocky road to big gains that might not happen – FT.com.
HatTip to Dave Lull.