Taleb's barbell strategy

[Maverick74]

Example 2, fictional story...ET. Say a guy is a boring accountant and dreams of becoming an at home daytrader. He is married with 2 kids. He thinks he has 2 choices. Stay at a job he hates which is safe but will support his family, or quit his job, take all his savings and go into daytrading full time. There are tons of threads on ET about this btw. Both choices are sub optimal. Why not spend most of your time doing the boring job you hate (it pays the bills and keeps the wife happy) and spend a little bit of time and money giving this daytrading a try. If he gets lucky (and I mean really lucky) and finds out he is a master daytrader, then he will be happy he took the risk. If on the other hand he loses his entire "small" experimental account and he realizes he hates daytrading, then he will be happy he never quit his accounting job. The wife will be happy too.

Too often we make life decisions as either or when in reality there is a more optimal solution that both maximizes our utility and produces a long term acceptable result.

 

[Sig]

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
.

The spread between "risk free" interest and inflation hasn't changed much over the years. Looking at interest rates or returns in isolation is missing half the picture.

 

[Daal]

Example 2, fictional story...ET. Say a guy is a boring accountant and dreams of becoming an at home daytrader. He is married with 2 kids. He thinks he has 2 choices. Stay at a job he hates which is safe but will support his family, or quit his job, take all his savings and go into daytrading full time. There are tons of threads on ET about this btw. Both choices are sub optimal. Why not spend most of your time doing the boring job you hate (it pays the bills and keeps the wife happy) and spend a little bit of time and money giving this daytrading a try. If he gets lucky (and I mean really lucky) and finds out he is a master daytrader, then he will be happy he took the risk. If on the other hand he loses his entire "small" experimental account and he realizes he hates daytrading, then he will be happy he never quit his accounting job. The wife will be happy too.

Too often we make life decisions as either or when in reality there is a more optimal solution that both maximizes our utility and produces a long term acceptable result.

Those are good stories of taking advantage of free or cheap optionality. Maybe I wasn't clear enough in the OP. I'm more interested in discussing applications of this strategy as far as investing/wealth preservation goes. Like dicussing what constitutes 'boring inflation protected cash'.

Calling something boring cash is subject to a big estimation errors that Taleb warns about. So he comes out and says 90% of the money should avoid risk but doesn't tell how to arrive at what is safe. What's the role of historical data on this? Should one trust governments with good reputations? How does one estimate what constitutes safety? It isn't hard to come up with dozens of examples where investors sitting on short-term government bonds got killed. In Argentina they manipulated price indexes so investors thinking inflation linked stuff is safe could end up being a turkey one day
Taleb spends most of this time calling people idiots instead of actually helping people to arrive at a solution

 

[Martinghoul]

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.

Sure, I have some sympathy with this logic, but let's stress-test it a bit to examine its practical limitations...

Suppose I am a full time finance guy, but I have this dream of getting into medicine and actually helping people. To that end I am going to devote 10% of my time to medicine. Am I likely to realize my dreams of becoming a doctor? Are you going to be very enthusiastic about hiring me as your family physician?

I suppose what I am getting at is that there are some things which one can do moderately productively with 10% of their time and actually achieve something, even if that something is just satisfaction from pursuing a dream. There are many other things where this is just not possible.

 

[Martinghoul]

Those are good stories of taking advantage of free or cheap optionality. Maybe I wasn't clear enough in the OP. I'm more interested in discussing applications of this strategy as far as investing/wealth preservation goes. Like dicussing what constitutes 'boring inflation protected cash'.

Calling something boring cash is subject to a big estimation errors that Taleb warns about. So he comes out and says 90% of the money should avoid risk but doesn't tell how to arrive at what is safe. What's the role of historical data on this? Should one trust governments with good reputations? How does one estimate what constitutes safety? It isn't hard to come up with dozens of examples where investors sitting on short-term government bonds got killed. In Argentina they manipulated price indexes so investors thinking inflation linked stuff is safe could end up being a turkey one day
Taleb spends most of this time calling people idiots instead of actually helping people to arrive at a solution

That's 'cause NNT is a big picture ideas guy, who can't be bothered with trivial details... Those are for lesser intellects.

 

[Maverick74]

Sure, I have some sympathy with this logic, but let's stress-test it a bit to examine its practical limitations...

Suppose I am a full time finance guy, but I have this dream of getting into medicine and actually helping people. To that end I am going to devote 10% of my time to medicine. Am I likely to realize my dreams of becoming a doctor? Are you going to be very enthusiastic about hiring me as your family physician?

I suppose what I am getting at is that there are some things which one can do moderately productively with 10% of their time and actually achieve something, even if that something is just satisfaction from pursuing a dream. There are many other things where this is just not possible.

Sure Marty, there are ALWAYS impractical ideas. I'm an accountant and I would like to be an astronaut. Clearly I can't devote 10% of my time towards this or even 100% of my time past a certain age. I'm speaking broadly here. I believe most people live their lives at one extreme or another. I grew up in the Midwest where most of my friends were too scared to leave. They stayed. The end result was alcohol abuse, drug addiction obesity and divorce. Why? They were effing miserable. Hey..it happens. On the other hand, I have friends that hate their lives and say eff it, I'm going all in and moving to NY to make it on broadway. Both choices are dangerous to one's well being. Somewhere in the middle there is a better path that will protect your sanity while not living in a cookie cutter neighborhood working 9 to 5 eighty lbs overweight and hating your life. Of course one can't become a neurosurgeon in their mid 40's while spending some time on the weekends reading up on it. Leave it to you Marty to tap into the .000000001% that has that as their goal at 45 or 50.

 

[Maverick74]

That's 'cause NNT is a big picture ideas guy, who can't be bothered with trivial details... Those are for lesser intellects.

Marty, address me with this theory not NNT since you obviously have a dislike for him. I espoused this theory long before he ever put pen to paper on it. I've been telling this to people my whole life. So respond to me personally since I'm actually here and he's not. Thanks. It will make the conversation more relevant.

 

[Maverick74]

Those are good stories of taking advantage of free or cheap optionality. Maybe I wasn't clear enough in the OP. I'm more interested in discussing applications of this strategy as far as investing/wealth preservation goes. Like dicussing what constitutes 'boring inflation protected cash'.

Calling something boring cash is subject to a big estimation errors that Taleb warns about. So he comes out and says 90% of the money should avoid risk but doesn't tell how to arrive at what is safe. What's the role of historical data on this? Should one trust governments with good reputations? How does one estimate what constitutes safety? It isn't hard to come up with dozens of examples where investors sitting on short-term government bonds got killed. In Argentina they manipulated price indexes so investors thinking inflation linked stuff is safe could end up being a turkey one day
Taleb spends most of this time calling people idiots instead of actually helping people to arrive at a solution

Daal, here is the issue. When dealing with finance as Marty pointed out, we all define these words very differently. There are people on ET that think only making 20% a month selling options is modest and conservative (hey they could make 50% a month if they wanted to). Everyone here will get hung up on definitions. What is "safe", what is "risky". Hell there are some people here that believe the gov't is gong to confiscate any and all assets held in banks just because (you know the whole new world order thing). I think this will be challenging to have an open conversation about things that are not so easily defined.

I do think the general philosophy works well in real life where I don't have to live my life by some standard definition. It turns out I'm free to make my own choices, you know that whole free will thingy.

 

[Martinghoul]

Sure Marty, there are ALWAYS impractical ideas. I'm an accountant and I would like to be an astronaut. Clearly I can't devote 10% of my time towards this or even 100% of my time past a certain age. I'm speaking broadly here. I believe most people live their lives at one extreme or another. I grew up in the Midwest where most of my friends were too scared to leave. They stayed. The end result was alcohol abuse, drug addiction obesity and divorce. Why? They were effing miserable. Hey..it happens. On the other hand, I have friends that hate their lives and say eff it, I'm going all in and moving to NY to make it on broadway. Both choices are dangerous to one's well being. Somewhere in the middle there is a better path that will protect your sanity while not living in a cookie cutter neighborhood working 9 to 5 eighty lbs overweight and hating your life. Of course one can't become a neurosurgeon in their mid 40's while spending some time on the weekends reading up on it. Leave it to you Marty to tap into the .000000001% that has that as their goal at 45 or 50.

I have sympathy with the above, so you won't elicit much disagreement from me. I just thought that it was worth pointing out the natural limits to this logic. Pls take that in the spirit in which it was offered, no more and no less.

Marty, address me with this theory not NNT since you obviously have a dislike for him. I espoused this theory long before he ever put pen to paper on it. I've been telling this to people my whole life. So respond to me personally since I'm actually here and he's not. Thanks. It will make the conversation more relevant.

I was actually responding to daal, tbh. My comment about NNT still stands.

 

[Maverick74]

I have sympathy with the above, so you won't elicit much disagreement from me. I just thought that it was worth pointing out the natural limits to this logic. Pls take that in the spirit in which it was offered, no more and no less.

I was actually responding to daal, tbh. My comment about NNT still stands.

There are natural limits to everything Marty. I wanted to be a professional baseball player when I was 7. That didn't work. That whole natural limits thing. Of course there is also that story of a black man that said he wanted to be President of the US. I'm glad there are some people in this world that don't buy into that natural limits thing. Although in "spirit", I do believe most people should stay within reasonable limits. But that leaves a LOT of room for most people to work with.