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Posts Tagged ‘Antifragile’

Robust And Resilient

September 10, 2015 1 comment

A few posts ago, I laid down a timeline of significant events in the history of the Bitcoin movement. All of those events are positive developments that give the reader an impression of steady forward progress. However, it has been no bed of roses for the world’s first decentralized currency system. To highlight this fact, I decided to superimpose four of the events (in blue) that could have signaled the death of Bitcoin – but didn’t.

bitcoinbad

The Silk Road disaster, the China crackdown, the Mt. Gox implosion, or the dire SEC warning each in their own right could have caused the value of Bitcoin to go back to its initial value of zero and stay there – but it didn’t. Thus far, Bitcoin has shown remarkable robustness and resiliency. Perhaps it’s even antifragile – gaining strength with each attempt to kill it.

As long as enough people believe that Bitcoin has value, then it will have value. As cell phones become more and more affordable to the poor and third world countries continue to act fiscally irresponsible with their fiat currencies, Bitcoin’s volatility will decrease and its utility as a fast, low fee, direct, mechanism of economic exchange will increase.

Bitcoin was never designed out of the box to “fit in” with the established ways of dealing with money through centralized institutions that can collapse or go bankrupt via greed/corruption. Perhaps it never will fit in, but Bitcoin can exist side-by-side with the established big wigs; acting as a deterrent to incompetent governments (Zimbabwe, Greece, Cyprus?) and serving as an escape valve to those affected by that incompetence.

bitcoinchart

Categories: bitcoin Tags: ,

Second Time Around

July 27, 2014 1 comment

Since his philosophical ideas are refreshingly new, counter-intuitive, and mind-boggingly deep, I decided to re-read all four of Nassim Taleb’s books. I just finished re-reading “Antifragile” and am now well into my second pass through “The Black Swan“.

As with all good books that resonate with me, I find that re-reading them brings new learning, excitement, and joy. It’s almost like I’m reading them for the first time.

The reason I’m magnetically drawn to Mr. Taleb’s work is because his mission is truly noble and humanitarian.  It is to make the world a better place by creating a system in which so-called elites (e.g. economists, politicians, academicians, Harvard-trained managers, high frequency traders) with no “skin in the game” cannot harm millions who follow their predictions/advice/policies without being harmed themselves. Requiring big-wigs to place some “skin in the game” (Mr. Expert, does the content f your portfolio align with your forecasts/advice?) precludes the alarming and increasingly asymmetric transfer of anti-fragility from regular Joe Schmoes like you and me to smug, self-serving elites.

Show SkinIn case you are new to the concept of antifragility, consider the figure below. A fragile system is one in which, as the magnitude of an external stressor is applied, the harm it experiences increases non-linearly. An antifragile system is the exact opposite. It is more than simply resilient or robust. It actually gains from volatility (up to a point, of course).

Convex Concave

Since you can’t know what’s going to happen in the next five minutes, let alone far into the future, you can’t guarantee your own personal antifragility. But you can take concrete action to reduce your fragility and minimize the risk of someone stealing whatever antifragility you do have. Eliminating debt decreases fragility. Adding redundancy (e.g. two kidneys, two lungs) and “having options” reduce fragility. Government bailouts transfer antifragility from taxpayers to executives and shareholders. Lack of term limits transfers antifragility from voters to politicians. Corporate mergers and buyouts transfer antifragility from employees to executives. Increasing size and centralization increases fragility. Lack of exercise increases fragility. Long periods of obsessively manufactured stability increase fragility. The ultimate fragilizer, and the one in which we can only accept, is…….. TIME.

Taleb Terminology

 

All Upside, No Downside, No Conscience

Check out these three financial portfolio performance graphs from Mr. Nassim Taleb:

FRA

A fragile portfolio is one which is prone to getting decimated by a rare, unpredictable, event (a.k.a. a Black Swan). A robust portfolio is one which is relatively immune to the effects of a devastating Black Swan. An antifragile portfolio is one which experiences spectacular gains from a Black Swan.

Mr. Taleb asserts that the world’s financial system has been (since the 80’s when we first started bailing out banks), and still is, fragile. As long as bankers know that we, the taxpaying public, will continue to shoulder the cost when they blowup because they are too big too fail, they will continue to exhibit incompetent, reckless, risky behavior backed by bogus PhD calculations. They get their perennial bonuses before each big bust for “doing well“, but aren’t forced to give them back when they lose more money in an instant from a Black Swan than all the profits they’ve ever made previously in the history of banking. It’s a no-brainer with all upside and no downside. What a life… if you don’t have a conscience.

So, how do you construct a anti-fragile portfolio? According to Mr. Taleb, you allocate 80% of your portfolio to “cash” and 20% to wildly speculative investments. It’s called the barbell strategy – weighted investments at both ends of the risk spectrum and nothing in the middle. In the worst case, you’ll lose the full 20%, but the sky is the limit if you’re right with your speculative investment choices. The challenges are:

  • To muster up the nerve to actually go against what the mindless “portfolio theory” trained herd says and reallocate your currently fragile portfolio,
  • Figure out exactly what Nassim means by “cash” (no, it’s not a savings account at Citibust or Bank Of Nightmerica),
  • Decide on which speculative financial instruments to invest in (gold/metals? commodities? real estate? “other”?) .

BD00 knows what these challenges are because, as an unsophisticated investor, he’s struggling to conquer them himself. WTF!

investment allocation

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