Tail Risk Killers

Post by **jacob** » Sat Jun 16, 2012 1:16 am

http://www.amazon.com/Tail-Risk-Killers ... 07178490X/
--- contains roughly 50 times more ideas and insight than the average nonfiction book (except mine of course ;-P )

--- doesn't pull any punches

--- timely in the current sense (discusses credit/liquidity/insolvency crises)

--- contains heavy math (relevant to and at the level of market/risk quants) with discussion/opinion

--- also a few sprinkles of quantum mechanics (why not?)

--- disorganized/nonstructured (if you don't know a Wiener process from a Lebesgue measure you can skip along for the next interesting idea)
If you think Taleb uses too little math and too many anecdotes, you're gonna love this book. If every nonfiction book was like this, we'd probably be living on a different planet.

J_ · Post by J_ » Sat Jun 16, 2012 8:36 am

Thank you for sharing.

I just read the conclusion, one of the last sentences of the author:
"I know that the financial system today is almost entirely speculative, as opposed to driven by fundamentals."
So I think the best advise for me is to stay without stocks and the connected " mathematical magic manipulation trade" .

Is it time to leave stocks out of the PP system?

Dragline · Post by **Dragline** » Sat Jun 16, 2012 2:54 pm

Looks great. Will definitely read.

Post by **jacob** » Sat Jun 16, 2012 4:14 pm

@J_ - The book focuses more on the real big issues like credit default swaps, sovereign debt, counterparty risk. Equity is probably the easiest to deal with. It's the bondholders that are the problem because they get the government bailouts (probably because the bondholders in many cases are big pension funds ...and you can imagine how the voters feel about politicians when their pensions fail to materialize).
Stocks are definitely not immune though. For the broad market the earnings yield (E/P --- the inverse of the P/E ratio) minus the risk free rate has been negative since the mid 1960s until recently. This means that stock investors have essentially been paying for accept risk in return for a lower yield(!) in order to get capital gains. It's similar to how the bond market has worked since the 1980s with bonds now having negative real returns (you're paying the counterparty to protect your money as stuffing them under the mattress would presumably be more costly?!).
(My solution to this is to hold dividend paying stocks in defensive sectors that pay more than the risk free rate. That and to reduce my need to pay money to other people as much as possible.)

Chad · Post by **Chad** » Sun Jun 17, 2012 12:10 am

That's an over the top review for an introvert.

LonerMatt · Post by **LonerMatt** » Sun Jun 17, 2012 12:50 am

This sounds like a book that would simultaenously go way over my head, and also teach me a lot.
Let's order that sonna bitch.

OurLifeInc. · Post by **OurLifeInc.** » Sun Jun 17, 2012 3:47 pm

"(My solution to this is to hold dividend paying stocks in defensive sectors that pay more than the risk free rate. That and to reduce my need to pay money to other people as much as possible.)"
So my Facebook investment is ill-advised? Just kidding!
I have been in the dividend paying, defensive stocks since 2007-2008. Just looking for those things that people won't be able to live without as this thing (these things...) gets sorted out. Probably need to take that a step further even and look for the defensive names that pay a dividend that also have above average financial health. Exelon was (kinda still is) a favorite of mine, however they seem to be taking on quite a bit of debt for their merger. The timing of this debt may be poor in a sh!t hits the fan situation. Or maybe not. Who knows. JNJ still has a AAA credit rating and a "fortress" balance sheet. It's stocks like JNJ that help me sleep at night.

Maus · Post by **Maus** » Mon Jun 18, 2012 8:20 pm

Just ordered it from the library for pick up. Dreading the math (differential equations drove me out of chemistry back in uni days), but intrigued by @Jacob's review and the lone poster on Amazon.

LonerMatt · Post by **LonerMatt** » Tue Jun 19, 2012 8:36 am

The math will go way over my head. I can't do quadratics - let alone anything more complex.

pooablo · Post by **pooablo** » Wed Jun 20, 2012 12:35 am

This looks like a very, very, cool book! I can't wait to get a copy and go through the mathematical analysis.

OurLifeInc. · Post by **OurLifeInc.** » Sun Jun 24, 2012 10:44 pm

12 chapters in and it is definitely an interesting read. It has the tone of zerohedge ("Tyler Durden" wrote the foreward), which I enjoy. The math is a bit over my head at times, but the book does a good job of explaining in many cases.
Thinking back to Jacob's comment regarding dividends stocks in defensive sectors, I can't help but think of the Poland case in one of the earlier chapters. Where foodstuff spending maintained while anything considered non-essential was dropped. Unfortunately energy was withheld from the stats that were kept at the time. Consumer staples and other "needs" equities certainly seem like the place to be. That said, all of the talk regarding credit risk has me wondering whether companies will need to fund themselves for a period of time going forward. So looking for companies that are able to service their debt, fund their operations/growth AND maintain their dividend seems to be the place to be (easier than it sounds, I'm sure...).
All the talk of Treasuries has been very interesting as well. Nice to know that the author thinks that an apocalypse is unlikely...however many scenarios sound uncomfortable to say the least. Good thing we are all pretty comfortable with being uncomfortable!

Maus · Post by **Maus** » Mon Jul 16, 2012 6:24 pm

@Jacob

This kind of math makes you happy? I got about two-thirds of the way through McGinn's book, then surrendered. Whilst I was able to grasp most of the concepts, I confess that the math really agitated me. They say lawyers become lawyers so that they don't have to do math. It might just be true in my case. Anyway, thanks for the recommendation. Intuitively, rather than for rational reasons, the book confirmed in me a deeper commitment to the Permanent Portfolio.

dragoncar · Post by **dragoncar** » Mon Jul 16, 2012 9:42 pm

Yeah, I'm all for manipulation of symbols according to rules (math), but there are more enjoyable ways to do this. Like Tetris.

Maus · Post by **Maus** » Mon Jul 16, 2012 11:56 pm

@dragoncar

Had to laugh. I am addicted to Tetris. I had to take it off my computer because it was a huge time sink. I still have a demo on my cell phone that basically ends once you reach the second level. It's like drip morphine instead of mainlining heroin.

Post by **jacob** » Thu Jul 19, 2012 5:07 am

@Maus - Yeah. On a personal development note, I used to dislike statistics (and statistically related fields of physics like thermodynamics and solid state physics) in favor of geometric math and physics. Now I really enjoy them. Since this is the first time I've seriously looked at it (understanding it, not just passing exams), I find it very fascinating---it's a new way to abstract the "unseen" world. Yet instead of abstracting unseen thins like electrons and muons, the focus is on "what could be" in the real world (the one with hammers, bricks, and oranges).

Lepore64 · Post by **Lepore64** » Thu Jul 19, 2012 10:02 pm

also @Maus
Nice job ordering it from the library, it plays very well with ERE. It would be my temptation to buy a bunch of books (ie: waste my money) on frugal living and anti-consumerism. Which is funny...and sad.

jennypenny · Post by **jennypenny** » Sun Jul 22, 2012 10:28 pm

Still reading

I've had to reach for my dictionary several times (a good thing). I can't remember the last time that happened.
@Jacob--Have you become more risk averse in your new job? A couple of hedge fund friends have tried to convince me that most traders don't fit the profile of the risk-hungry trader. Most are focused on avoiding risk and preserving capital. The book is making me question my risk tolerance.

jennypenny · Post by **jennypenny** » Fri Jul 27, 2012 6:23 pm

I'm sitting at the swim club reading Tail Risk Killers. One of my friends came up to me and said "I can't believe you're reading that out in the open!"
Haha, the title made her think it was Mommy Porn.

jennypenny · Post by **jennypenny** » Fri Jul 27, 2012 6:23 pm

I'm sitting at the swim club reading Tail Risk Killers. One of my friends came up to me and said "I can't believe you're reading that out in the open!"
Haha, the title made her think it was Mommy Porn.

Maus · Post by **Maus** » Fri Jul 27, 2012 8:44 pm

@jennypenny

LOL. So you got the edition with Fabio on the cover...
Seriously though, if this is your light, pool-side reading I hesitate to ponder what you tackle when you really get serious.