Even long-term investors have to respect bet sizing. There are limits to how much correlated bets one can make, unless they are never wrong
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Is Warren Buffett blind to tail risks/risks of ruin?
- Thread starter Daal
- Start date
Even long-term investors have to respect bet sizing. There are limits to how much correlated bets one can make, unless they are never wrong
Russia 1917, Cuba in the 60s. Perhaps North Korea as well. I'm sure there are plenty of others. With the creation of nuclear weapons, there is now a new way investors can be wiped out as wellwhere?
I am sure you will claim hyperbole or poetic license.
Russia had a stock market in 1917? Cuba had one in the 1960s? North Korea ever had a stock market? I don't think so! If there's a worldwide nuclear war your puts are going to be worthless no matter how much they're in the money. You're overthinking this.Russia 1917, Cuba in the 60s. Perhaps North Korea as well. I'm sure there are plenty of others. With the creation of nuclear weapons, there is now a new way investors can be wiped out as well
According to Meb Faber the returns from investors from Russia and Cuba on those periods was -100%. And where did I say anything about puts? I'm all for global diversification, if anythingRussia had a stock market in 1917? Cuba had one in the 1960s? North Korea ever had a stock market? I don't think so! If there's a worldwide nuclear war your puts are going to be worthless no matter how much they're in the money. You're overthinking this.
To paraphrase...Russia 1917, Cuba in the 60s. Perhaps North Korea as well. I'm sure there are plenty of others. With the creation of nuclear weapons, there is now a new way investors can be wiped out as well
If a stock mkt goes to 0, but there's nobody to to witness it ('cause we've all been nuked into oblivion), does it really matter?
St Petersburg Stock Exchange was founded by an edict of Peter the Great:Russia had a stock market in 1917? Cuba had one in the 1960s? North Korea ever had a stock market? I don't think so! If there's a worldwide nuclear war your puts are going to be worthless no matter how much they're in the money. You're overthinking this.
http://som.yale.edu/faculty-researc...rch-data/st-petersburg-stock-exchange-project
Even long-term investors have to respect bet sizing. There are limits to how much correlated bets one can make, unless they are never wrong
Or if they know they are going to receive 10billion in premiums to invest next year.
I stand corrected on Russia. No data on how big it was, but I'm guessing it's equivalent to the Zimbabwe stock exchange vs the U.S. now. In other words, of absolutely no consequence in global finance. Puts, diversification, anything else isn't going to help you much in global nuclear war, or even one that somehow was only localized to the U.S. Again, you're overthinking this. I'd submit that there are enough low probability events that are technically possible (meteor causes global tsunami, solar storm destroys power grids.....) that if you set yourself up to prepare for each of them you'd end up with nothing. At some point we have to make the choice of living like the Sword of Damocles is hanging over our head or ignore the vast number of super low probability, high impact events that have an expected value near zero and live life the best we can.According to Meb Faber the returns from investors from Russia and Cuba on those periods was -100%. And where did I say anything about puts? I'm all for global diversification, if anything
At some point we have to make the choice of living like the Sword of Damocles is hanging over our head or ignore the vast number of super low probability, high impact events that have an expected value near zero and live life the best we can.
That's where the risk premia comes from.
I have seen refugees from Russia, Cuba, Vietnam, China.... wiped out in their motherland but rebuilt in less than a generation here in the US or elsewhere, became wealthier than before. What is within them cannot be taken away and that makes them antifragile. I bet you can say the same about Buffett.
You guys are missing my point, it's not about me being paranoid about tail risks, its about the following:
Buffett owned "nothing but goverment bonds" all the way to 2008. Then, he took all of that and put into stocks. Clearly there was a 'risk management' of some kind that made him avoid stocks before 2008, perhaps he was being guided by utility (he wanted to ensure he was going to remain wealthy no matter what) or by something else, some sort of tail risk avoidance. Even though he found plenty of cheap stocks before that (and he bought them through Berkshire but NOT with his personal account), and he hates cash long term, YET he STILL avoided stocks with his personal account for YEARS.
But in 2008 that changed, valuations improved and he went "all-in", but as I have argued using Taleb's and the Kelly formula, in most instances more benefits (returns) do NOT warrant one throw caution at the wind like that. He junked his risk management either because:
1)He was being guided by something else, perhaps the deside to maximize Fame/Reputation rather than risk adjusted wealth
2)His is blind to tail risks and simply doesn't believe he can be wrong about the US, no matter what is thrown at the country. So perhaps he thought "ah, I was being paranoid about holding all these bonds, US will come back from this, no need to insure against something that I was insuring before, that was silly"
Either he made a "mistake" before 2008, or he made a "mistake" after it. The way he behaved does not look consistent. Its possible that he wasn't aware that more benefits don't change the decision (or position sizing) much but I doubt, he is quite familiar with the Kelly formula and met personally with many people who swear by it (Thorp etc)
Buffett owned "nothing but goverment bonds" all the way to 2008. Then, he took all of that and put into stocks. Clearly there was a 'risk management' of some kind that made him avoid stocks before 2008, perhaps he was being guided by utility (he wanted to ensure he was going to remain wealthy no matter what) or by something else, some sort of tail risk avoidance. Even though he found plenty of cheap stocks before that (and he bought them through Berkshire but NOT with his personal account), and he hates cash long term, YET he STILL avoided stocks with his personal account for YEARS.
But in 2008 that changed, valuations improved and he went "all-in", but as I have argued using Taleb's and the Kelly formula, in most instances more benefits (returns) do NOT warrant one throw caution at the wind like that. He junked his risk management either because:
1)He was being guided by something else, perhaps the deside to maximize Fame/Reputation rather than risk adjusted wealth
2)His is blind to tail risks and simply doesn't believe he can be wrong about the US, no matter what is thrown at the country. So perhaps he thought "ah, I was being paranoid about holding all these bonds, US will come back from this, no need to insure against something that I was insuring before, that was silly"
Either he made a "mistake" before 2008, or he made a "mistake" after it. The way he behaved does not look consistent. Its possible that he wasn't aware that more benefits don't change the decision (or position sizing) much but I doubt, he is quite familiar with the Kelly formula and met personally with many people who swear by it (Thorp etc)