Antifragile by Taleb (AxelMMG Book Club Thread)

[AxelHeyst]

My MMG has decided to read Antifragile by Taleb next. (Previous books were 'All of Mark Boyle's stuff' and 'Surviving the Future' by David Fleming). Instead of discussing the book in a Signal chat, we'll discuss it here in this thread. All are welcome to join in the discussion here. In about six weeks, we'll have a video chat about it (MMG members only).

Some previous threads related to Taleb's work generally and antifragility specifically:
Taleb's New Skin in the Game Paper
Is ERE akin to Taleb's Antifragility?
Taleb's Aphorisms
Antifragile

[NewBlood]

According to my library app, I am 2 weeks away from finally getting Antifragile. I would love to participate in this discussion. Hopefully I won't be too far behind on the reading.

And if it's at all practical to bring some of the Boyle discussion back to the forum, I'd be very interested in it. I really enjoyed his books.

[Western Red Cedar]

ERE has done reading groups in the past, no? Perhaps send feelers out to see if there is any interest.

We are actually reading Antifragile right now. I'll give this thread a bump for other interested parties. I haven't started it yet so you probably aren't too late to join.

[classical_Liberal]

Taleb is one of my favorite authors, not only a genius, but a talented writer. He takes amazingly complex and potentially dry topics, but manages to make you literally laugh out loud while explaining them.

[AxelHeyst]

It's going to be something like 6 weeks before we have our Antifragile discussion call, because of holidays and our deep dive rotation, so yes, plenty of time for all to join in.

[avalok]

This is timely, as I am halfway through this book; hot off the heels of Fooled by Randomness. I plan to re-read Antifragile immediately after finishing, because I can tell only some of it is sinking in properly, and so hope to contribute here.

P.S. Agree with classical_Liberal regarding the talent of his writing.

[jacob]

BTW, in case anyone wants to learn about antifragility in trading terms and equation form, Taleb's first and mostly unknown book is very interesting.

https://www.amazon.com/Dynamic-Hedging- ... 0471152803

In those terms, antifragility is an long strangle position (gamma>0) that is beta and delta neutral and is undervalued by the market due to using a simplistic(*) outcome model.

(*) Hint: "Fooled by randomness".

What's really interesting here is that communicating these few words of jargon to an options trader with a couple of years of experience aptly summarizes several hundred pages of subsequent prose. "Ohhh, so that's what he's talking about." IIRC, it's also how he made his FU money. And basically his underlying theme for all the non-technical books and papers.

Not sure I'd recommend Dynamic Hedging as a first book on options. However, options are a rather good mental model for second-order outcomes relative to some underlying presumptions that "everybody agree on".

[avalok]

@jacob you mentioned this book in my journal a couple of weeks ago; what would you say the entry barrier is to this book? I'm wondering what understanding of mathematics, derivative securities etc. one is expected to have. It sounds interesting, and I'm up for a Taleb binge currently, but don't want to open up the book to find it is way over my head.

[jacob]

@jacob you mentioned this book in my journal a couple of weeks ago; what would you say the entry barrier is to this book? I'm wondering what understanding of mathematics, derivative securities etc. one is expected to have. It sounds interesting, and I'm up for a Taleb binge currently, but don't want to open up the book to find it is way over my head.

Easy enough for options traders with a couple of years of experience. Gibberish to anyone else.

I'd say it means that unless one is sufficiently familiar with one's Natenberg to draw the payoff curve for, lets randomly say, a long OTM put option and a short ATM call option, during a job interview, it's gonna be hard to appreciate the book.

OTOH, it shows how deep the rabbit hole really goes albeit in an excessively specialized and jargonish way.

[WFJ]

Anti-Fragile = Structure your life/career to benefit from stress, like bones. Bones benefit from stress, grow stronger under stress, most modern systems and careers grow weaker over time, become brittle and eventually shatter when exposed to stress. Be like a bone.

[Western Red Cedar]

I've only made it through the prologue thus far, but was thinking about my personal investing strategy in relation to what seems popular among other ERE members - the permanent portfolio and/or the golden butterfly: https://portfoliocharts.com/2016/04/18/ ... butterfly/

I realized my strategy seems to be focused on resiliency, but not necessarily on antifragility. I am building a lot of backstops to withstand or recover from typical or even prolonged market downturns.

Do you think the PP and GB portfolios qualify as antifragile? Is that why ERE members seem to gravitate towards these portfolios?

*edited for grammar

[avalok]

I would have classified them as perhaps robust but not antifragile, because they do not become stronger in the face of volatility. The best the PP and the Golden Butterfly can offer is potential protection where other allocations would fail.

[xmj]

I'd also rate the PP more for robustness - there's no explosive payoff in high volatility times.

If you're looking at antifragility at a portfolio level, have a look at Mark Spitznagel, who runs Universa - Taleb is an advisor for them.

He wrote a book called Dao of Capital, which goes into the philosophical backgrounds, and another called Safe Haven, which gives more detail on how to set that all up.

[Jin+Guice]

@xmj, thanks for the tip.

I forget which book Taleb talks about it in, but he recommended a Barbell strategy where most assets are invested as safely as possible and then a small percentage of your portfolio is dedicated to taking asymetric bets where you normally lose money, but the pay-off is super huge. Ideally the pay-off hits at the exact moment your other portfolio is taking a hit from the black swan event. I think of the Golden Butterfly as the safe part of this strategy if you were trying to follow Taleb. Is that accurate to his philosophy or no?

[Western Red Cedar]

@xmj and avalok - Thanks for the clarification. I agree with you. I also realize I somehow missed Jacob's post above that gets at the heart of my question.

[Bankai]

I forget which book Taleb talks about it in, but he recommended a Barbell strategy where most assets are invested as safely as possible and then a small percentage of your portfolio is dedicated to taking asymetric bets where you normally lose money, but the pay-off is super huge. Ideally the pay-off hits at the exact moment your other portfolio is taking a hit from the black swan event. I think of the Golden Butterfly as the safe part of this strategy if you were trying to follow Taleb. Is that accurate to his philosophy or no?

It's worth remembering everyone plays a different game in markets. Taleb is a multimillionaire trader with decades of experience in markets and with a specific risk appetite. So what works for him might not necessarily work for the average punter. Imagine a portfolio with 90% cash ("as safe as possible") and 10% cryptos for an early retiree - the speculative part will likely be wiped out completely at some point while the "safe" part wouldn't look so safe after a couple of decades while for someone with hundreds of years' worth of expenses and massive income from books/speeches inflation is irrelevant and being "right" on the speculative bet bit is largely irrelevant anyway.

The barbell strategy of course might be sound when applied taking one's specific circumstances into consideration. So for a typical early retiree with somewhere between 25-33x expenses, the safe part might possibly look like some sort of 50/50 or 60/40 or plaint world index tracker or whatever else is deemed "safe" in the long run but still provides some level of growth (so your GB/PP idea makes sense here), while the 10% wild bet could be something that can take one from lean to obese FIRE if succeeds.

I think the barbell strategy is a fascinating concept and can likely be applied to most non-financial areas of life where it's even more interesting. Perhaps a writer spends 90% of their time mass-producing low-quality articles to make a living and 10% on a novel that has a tiny chance of making them rich and famous.

[avalok]

The thing I found so powerful about the barbell strategy is the insulation it can provide. The position is one amenable to taking more risks than most would consider. Taleb discusses this at several points in the book; that people should be braver, that he wants people to take more risks. Unfortunately the taut (no slack) lives most lead make risk taking a question of rich or ruin. The barbell is amenable to risk taking because you have something you can always fall back on; you become convex. In the case of the @Bankai's author, they may be considerably bolder in the magnum opus they create, producing a far greater work than they ever would attempt without the asymmetry.

[xmj]

@avalok fair point, but as originally laid out (90% treasuries, 10% high risk investments) is a guaranteed loss in times like these with negative real rates on those treasuries (US ~ -4%, EU ~ -7%).

@Jin+Guice I think you're close. I don't recall reading into Taleb that the 10% investments are thought as a hedge so have explosive payoffs as markets and the rest go down. As I understand they were thought of as cheap bets on things with explosive (positive, non-insurance) payoffs - think startups, R&D, etc. Spitznagel covers insurance-type payoffs in Safe Haven.

[avalok]

I suppose a guaranteed loss until the asymmetry kicks in. Not that 10% generic high risk investments will equal success, it's far more nuanced than that, but I'm not sure the strategy can be discounted because of negative real rates, as in I don't know enough to say either way.

Your mention of negative real rates is interesting because it highlights the notion from the book of Extremistan (systems prone to Black Swans); guaranteed losses on low risk investments incentivises pursuit of ever riskier securities, eventually even if they do not make sense, until a major correction is borne. Given this territory, investing becomes a question of coping with Extremistan, which is what I read the barbell as an attempt to do.

Going from the principle that just accepting the default (Extremistan-inducing) behaviour is not the approach to take, even in a world of negative rates, what else is one to do? It can feel a bit damned if you do, damned if you don't.

[xmj]

Do note that Black Swan was released in 2007, predating both ZIRP (or worse, NIRP) and negative real interest rates.

To maintain capital in the first place you *must* find something that can generate positive real returns even with the 90% invested in 'safer' securities. Have a look at Spitznagel for the details.

The conventional understanding of risk as volatility, viz temporary drawdowns is in my opinion a bit of a misnomer. I'm partial to the approach that risk is not temporary, reversible drawdowns but permanent, irreversible loss of capital. A good pointer here would be Anthony Deden of Edelweiss Holdings, there's an excellent recording of him by Grant Williams (2017, then at RealVision) and a followup from 2021.