Posts Tagged ‘Taleb’

As I foreshadowed last week in The New World, I want to explore Nassim Nicholas Taleb’s Fooled by Randomness and The Black Swan in some depth. The books aren’t strictly about investing, which Taleb regards as a “less interesting, more limited –and rather boring –applications of [his] ideas,” but my interest is in investment, particularly deep value investment, and so I’ll be exploring his ideas in that context. It is no small subject, and I don’t pretend to fully understand everything that Taleb has to say. Ideally, I’d complete it before springing it on you. Alas, my daily posting schedule won’t allow that. My apologies in advance, as this will likely progress in fits and starts, requiring “decisions and revisions which a minute will reverse.”

Taleb’s ideas appeal to me for a variety of reasons: I see Montaigne’s “Que sais-je?” (“What do I know?”) as a golden thread linking Austrian economics, value investment and a variety of other views I hold unrelated to finance and investment. Benjamin Graham, being the Latin, Greek and French-speaking polymath that he was, no doubt enjoyed Essais in its original form (whereas I had to grit my teeth through the Cotton translation, before learning that connoisseurs prefer M.A. Screech for his lyrical Raymond Sebond). Montaigne may have had some influence on Graham’s concept of margin of safety, his habit of professing to know little about the businesses of the securities in which he invested, and generally cautious and conservative approach. Montaigne writes about about the failure of his own faculties to aid him in his comprehension of the world.  We don’t even understand the past – despite our “fantastic, imaginary, false privileges that man has arrogated to himself, of regimenting, arranging, and fixing truth” – so how can we possibly see what will happen in the future? We can’t. The beauty of Montaigne is that he presents a way forward through the gloom. How do we proceed? Through waver, doubt and inquiry. Taleb offers a similar view in Fooled by Randomness and The Black Swan, and that’s what makes the books so enjoyable.

Malcolm Gladwell’s Blowing up is rich in biographical detail on Taleb, and reads to me like Fooled by Randomness in essay (despite Taleb’s protestations that “while flattering,” it put him in the “wrong box”). Gladwell sets the table by describing a meeting between Victor Niederhoffer, then “one of the most successful money managers in the country” and Taleb:

He didn’t talk much, so I observed him,” Taleb recalls. “I spent seven hours watching him trade. Everyone else in his office was in his twenties, and he was in his fifties, and he had the most energy of them all. Then, after the markets closed, he went out to hit a thousand backhands on the tennis court.” Taleb is Greek-Orthodox Lebanese and his first language was French, and in his pronunciation the name Niederhoffer comes out as the slightly more exotic Niederhoffer. “Here was a guy living in a mansion with thousands of books, and that was my dream as a child,” Taleb went on. “He was part chevalier, part scholar. My respect for him was intense.” There was just one problem, however, and it is the key to understanding the strange path that Nassim Taleb has chosen, and the position he now holds as Wall Street’s principal dissident. Despite his envy and admiration, he did not want to be Victor Niederhoffer — not then, not now, and not even for a moment in between. For when he looked around him, at the books and the tennis court and the folk art on the walls — when he contemplated the countless millions that Niederhoffer had made over the years — he could not escape the thought that it might all have been the result of sheer, dumb luck.

The punchline is that Niederhoffer blew up (for the second time, thereby fulfilling his own definition of a hoodoo):

Last fall, Niederhoffer sold a large number of options, betting that the markets would be quiet, and they were, until out of nowhere two planes crashed into the World Trade Center. “I was exposed. It was nip and tuck.” Niederhoffer shook his head, because there was no way to have anticipated September 11th. “That was a totally unexpected event.”

I’m not going to recapitulate Gladwell’s article here, but it’s well worth reading in its entirety. As an aside, Niederhoffer’s The Education of a Speculator is also an excellent read. It is interesting to compare Niederhoffer’s exhortation to “test everything that can be tested” against Taleb’s “naive empiricist,” but I’ll leave that for another day. For me, one of the most interesting aspects of Taleb’s philosophy is his attack on “epistemic arrogance” and its application to value investment. As I have said before, I believe there are several problems with the received wisdom on value investment, and this is one worthy of further exposition.


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