Taleb's barbell strategy
- Thread starter Daal
- Start date
Depends on what your goals are. Mathematically he is correct regarding risk. Most people try to reduce risk by "diversification" assuming low correlation of assets. The problem is in times of high risk almost all correlations go to 1. Since you are taking more risk then you think are but settling for medium or avg returns, it's better to take on maximum risk where the alpha premium is but simply isolate it to a small percent of your portfolio, in this case 10%.
To be honest, I think most investors would have trouble with this just in terms of determining what exactly constitutes a high risk strategy or asset. But I think in more generally applied in life, this is a great way to live. I think people should take risks in life. You only live once. You won't ever become successful watching every step you take and over hedging every move you make. Just don't go balls out. Protect your assets and your health but leave a small portion of your life to taking some chances. Let luck work for you. It's a great philosophy. Much better then trying to be too careful with your life or simply going all in and doing something stupid.
Firstly, boring cash isn't protected from inflation. I mean finding something boring, safe and yet inflation-protected is easier said than done. In fact, it's quite tricky. Glossing over this detail does NNT no credit.
Secondly, what are "maximally risky" securities? How do you deal with the idea that the really risky stuff isn't accessible to the overwhelming majority of retail investors?
It's an entertaining idea in theory, but that's about it.
Secondly, what are "maximally risky" securities? How do you deal with the idea that the really risky stuff isn't accessible to the overwhelming majority of retail investors?
It's an entertaining idea in theory, but that's about it.
Completely disagree. There are tons of risky assets out there available. The issue is the avg investor has no idea how to value them properly. And I think TIPS serve the function well, while not perfect, of protecting your money from inflation although that is not the purpose. The idea was to be "conservative" with that 90%. Again, the strategy I think works excellent when applied to life in general since most people in my opinion take way too much risk in investing and yet are extremely conservative with how they live their lives.
Read the book. Good thread. The devil is in the details.
The fact that correlations go to 1 during crisis, I believe, is one of the last things people need to be concerned about. These '1 correlation' periods reflect short-term liquidity problems and last very little time. Historically they are like less than 1% of the sample. More importantly, they are inhently unsustainable. The world wouldn't function if stocks, bonds, gold and real estate had 1 correlations. It just wouldn't make any sense. Diversifying across many assets (other than ocassional quick periods that are completely unsustainable) works. As a long there is no leverage (and the majority of people don't use it) the investor will be better off than loading 100% in US T-Bills and thinking he is going to be "safe". The key is to remove that risk of ruin like Taleb says, and diversification DIMINISHES that risk, even if it doesn't remove it totally (although it can)
With current interest rate environment, many good safe investments in theory end of being maybe not even worth the effort unless you are ok with less than 1% returns or locking money up for long periods. People chase risk most often when the safest investments offer extremely low returns (thus the sky rocketing stock market though this is an over simplification). Since interest rates rise at a snail's pace (.25% at a time is not going to be sexy until 2019 maybe), if you want any type of returns you gotta chase.
Taleb's approach sounds like something I had discussed years ago (I did not invent it) when interest rates were higher. Buying ITM LEAPS on stocks for you wanted to buy for same 100 shares going out 2 years and putting remaining cash in bills or notes to turn a pure stock portfolio into one that pays you interest "dividends". Worked well in 2000, now phhhttt
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Taleb's approach sounds like something I had discussed years ago (I did not invent it) when interest rates were higher. Buying ITM LEAPS on stocks for you wanted to buy for same 100 shares going out 2 years and putting remaining cash in bills or notes to turn a pure stock portfolio into one that pays you interest "dividends". Worked well in 2000, now phhhttt
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Which bits do you disagree with? My point is that it's easy to say that one should invest in "maximally risky" securities. What are they, though? Venture capital? Private equity? Vanilla public mkt equities?
As to TIPS, my point is precisely what you have mentioned. While you could argue that TIPS protect you from inflation, you certainly won't be able to claim that they're "safe and boring".
Not really sure about your general point about people being too risk averse in daily life. I am not capable of such a sweeping generalization.
Let's loosen this to what "I" would consider risky strategies. Penny stocks, option trading, junk debt, low quality preferreds, even a highly leveraged mutual fund or your next door neighbors new hedge fund. There are plenty of high flyers out there people can invest in or strategies that offer the chance to get "lucky".
The problem I see with most people (I have a lot of friends in the advisory business) is that investors usually take very little risk and underperform or they take way too much risk (ET). Meaning they take things into their own hands and start daytrading the ES with their retirement accounts.
Let me give a few examples how this strategy can work in real life. I had a buddy I went to school with that became a pilot. He also had this bug out of no where to get into acting. He wanted to move to LA. He called me up one day and asked for advice. I told him to do it! but here is what I told him to do. Don't quit flying and try to become a full time actor (very low probability). I said be a pilot in LA (he lived in the Midwest). But I said spend 10% of your time going to auditions. Again, this would probably not materialize into anything which is why I told him to limit it to 10% of your life. But you never know, you could get "lucky". So he did that. He moved to LA. Years and years went by. What was the result? Well he never "made it big". But the dude actually got parts in 15 or 20 films (bit parts). Never really amounted to anything serious. But he owns his own corporate aviation company and flys all over the world.
The point is, he could have quit flying and went all in to become an actor and starved. Or, he could have stayed in St. Louis and been a corp pilot there. But he ended up with the best result using the 90/10 strategy. Which is pursuing his dream of acting while at the same time, keeping the safe job (flying). He got to do both and at the end of his life he won't have to ask himself "I wonder if". THIS is how the 90/10 can be applied in real life.
The point is, he could have quit flying and went all in to become an actor and starved. Or, he could have stayed in St. Louis and been a corp pilot there. But he ended up with the best result using the 90/10 strategy. Which is pursuing his dream of acting while at the same time, keeping the safe job (flying). He got to do both and at the end of his life he won't have to ask himself "I wonder if". THIS is how the 90/10 can be applied in real life.