Nassim Taleb's 3 big ideas you need to know if you don’t want to lose money on your investments.

Why write about Nassim Taleb? So much about him has been written. But more importantly, he wrote so much about his own ideas it begs the question:

What could I possibly say that hasn't been said? Well… nothing, but that's not the point.  He has many original thoughts and I recommend reading his books, or some kind of summary of them. More importantly, he has at least three ideas that are too big to miss. So let’s dive right in and if it tickles your interest I encourage you to go deeper from there:

1. Black swan: The absence of evidence is not evidence of absence. 

Photo by Dorothe Wouters on Unsplash

In easier words- we don't know what we don't know, and just because there is no sign of something terrible happening doesnt mean it won't. 

Hmmm… something terrible happening that we wouldn’t have seen coming… I guess we wouldn't know what that feels like…*Covid*

What I took from this idea is the following:

Be prepared for the worst. the best will take care of itself. 

But what does that mean for you and your decisions?
You know the old saying: “Don’t put all your eggs in one basket”? Well, it has something to it, but it's not exactly like that, It’s ok to take risks as long as failure won’t lead to total destruction. 

The central asymmetry of life is this: In a strategy that entails ruin, benefits never offset the risks of ruin. Don’t get wrecked!

If you want to start your own business, think about your financial situation in the worst-case scenario. You can avoid ruin by taking on investments and not putting in all your life savings. Plus, once you’ll be asking other people for money they will challenge your idea and credibility which will help you to further sharpen your vision and eliminate blind spots. 

If you found a great investment opportunity it can still be a good decision to bet big on it as long as an undesired outcome won't destroy your future.

Black swan told us that unthinkable events can and will happen even if we find no evidence of them coming. So what kind of individuals, companies, institutions, or nations deal best with such events? That's part of the next book and my personal favorite of his many ideas:

2. Antifragile: The ability of a system to benefit and grow from a certain class of random events, errors, and volatility.

The opposite of fragile is not Robust. By definition, the opposite would be something that under stress becomes better, and stronger, hence antifragile. Now, there is a limit to what extent real-life examples follow that definition. But bear with me and keep an open mind for the following two:

• Your body. That's right. In some boundaries, we could consider our body as antifragile. You stress it through a workout - it gets stronger. You stress your immune system with a new pathogen and it gets stronger - or, you know, you could die of course… -and that’s where the example lacks evidence to fulfill the description of antifragility.

• Another example would be the entirety of humankind. We faced a lot of problems over the years, and every time, we came out stronger. I know that sometimes everything seems doomed and it's hard to believe that things are still improving. Don't take it from me but from one of the most inspiring speakers at TED Hans Rosling.

Another interesting thesis from antifragility is that redundancies can be a good thing. Redundancy in the right place is not wasteful; it can be an investment or insurance against unforeseen events. 

Short-term inefficiency can be very efficient in the long run. 

Supply shortages and political interference with our energy markets have proven the value of this statement. Is it redundant for a company to use different sources to power its production? Yes, probably. Could it have saved some companies from taking big losses in 2022? Maybe. 

Nature in a lot of ways can be very redundant and wasteful but life in its entirety remains the most antifragile example we know. I know I repeat myself, but, inefficiencies can look unnecessary, yet, maybe they are the price we need to pay to become antifragile. 

There is another interesting consequence of this kind of thinking when applied to investments. But I will spare you the details for two reasons: First, it is in itself enough material for another post. And second, and more importantly, I cannot and will not give investment advice. Way too many people are already doing that without even following their own advice… Which violates the rule of our last and final idea:

3. Skin in the game: Having a measurable risk when making a major decision—is necessary for fairness, commercial efficiency, and risk management.

People making decisions or advising others should have skin in the game. 

This is where it gets the most exciting and somewhat emotional for me. If someone doesnt have skin in the game (meaning benefits from the upside, but gets equally hurt from the downside), then you shouldn't take advice from them. It sounds like common sense but I encourage you to think about big decisions that affect your life. How much risk is your financial adviser taking? How much skin in the game does the architect of your house really have? To what extent are policymakers affected by their own decisions?

That kind of questioning and reflecting should be enough to arouse at least some emotions… But wait, there’s more! If you are somewhat like me you just love dealing with bureaucracy of any kind... Ah, the warm feeling when you enter a depressing-looking fluorescent-lit office after a long waiting period in an uncomfortable hallway. You have a problem and need help and then you look into the robotic eyes of a state-employed worker who could not care less. But what does this have to do with skin in the game? Bureaucracy is a construction by which a person is conveniently separated from the consequences of his or her actions. Hence, he or she does not have skin in the game - so no matter their actions and decisions, the effect will only be noticeable to you. And that’s why we hate these kinds of things. It feels unfair, and there is something inhuman in a transaction like that. In the Code of Hammurabi, it says “An eye for an eye” for a reason. But I digress. The bottom line and the principle you should note is this:

Avoid taking advice from someone who gives advice for a living, unless there is a penalty for their advice.

And likewise:

How much you truly believe in something can be manifested only through what you are willing to risk for it.

Nassim Taleb’s ideas are easy to find, fairly easy to understand, and yet they can be extremely hard to follow and implement. There are so many great sources, articles, youtube videos, and so on out there, I encourage you to start your own journey. If - god forbid - you accidentally read something twice then remember: Redundancy can be a good thing.

With that, I’m leaving you for now. Have a successful day.

GNF

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Bonus #1: States that have to deal with a lot of threats or disasters and still thrive should be looked at for advice since they might be on their way to becoming more antifragile.

Bonus #2: The Code of Hammurabi more accurately says this: If [someone] should damage the eye of another, they shall damage his eye. (law number 196)