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A lot of this boils down to having a better understanding of uncertainty and probability, especially in terms of being non-naive when it comes to extreme volati

A lot of this boils down to having a better understanding of uncertainty and probability, especially in terms of being non-naive when it comes to extreme volatility and risk. If you find ways to bet on this in a rigorous manner, the payoff is disproportionally larger. For the lay investor, the hard part is that this essentially means losing money 95% of the time [in those positions], something most people aren't comfortable with. That and some technical difficulties, like liquidity, etc. Of course, the bets needs to be sized correctly. This is not something you'd put all your money into, and this is part of the design from the beginning. See Kelly Criterion https://www.amazon.com/KELLY-CAPITAL-GROWTH-INVESTMENT-CRITERION/dp/9814383139 https://www.amazon.com/KELLY-CAPITAL-GROWTH-INVESTMENT-CRITE... for how these people think about it in a rigorous way. For those who are interested to read more on how this is done, have a look at the papers here: https://www.universa.net/riskmitigation.html https://www.universa.net/riskmitigation.html Spitznagel has also written a book called Dao of Capital which talks about the logic and underlying philosopy of these ideas: https://www.amazon.com/Dao-Capital-Austrian-Investing-Distorted/dp/111834703X https://www.amazon.com/Dao-Capital-Austrian-Investing-Distor... There's also Dynamic Hedging by Taleb https://www.amazon.com/Dynamic-Hedging-Managing-Vanilla-Options-ebook/dp/B000UG9JQA https://www.amazon.com/Dynamic-Hedging-Managing-Vanilla-Opti... which talks about these options and their structure in more technical manner, though I haven't read it.

hardwaresofton 6y ago
You don't even have to be a genius -- everyone expected the market to collapse, ~10 years of a low not-QE-but-definitely-actually-QE federal funds rate means a lot of companies and banks with access to that credit were over extending themselves. The financial system is cyclical -- funds like Berkshire Hathaway were starting to sit on more and more cash since last year. Even if you did nothing but follow their movements you would have been tipped off to the upcoming downturn. The consensus was that a crash was overdue, the question was just what was going to cause/trigger it. Also, disregard when pundits, government figures and central bankers say that this crash happened to an economy that was "doing great just a few months ago" -- it's just like 2008, the problems were there, they were just uncovered by COVID-19. Years of cheap loans, lax regulation, and lack of financial prudence means over-leveraged companies were taking risks they shouldn't have been, and all it took was one or two months of projected lost revenues for liquidity to implode. We're not even talking about restaurants who might run super tight margins here, we're talking about huge banks, institutions and large companies. Take the airlines for example, years of record profit and a clear view of what 9-11/H1N1/Ebola did to travel, yet no rainy day fund. And the risk COVID-19 caused was absolutely not unknown. We've had SARS, MERS, H1N1, Ebola all come through, businesses have had plenty of chances to consider insuring themselves or making themselves resilient -- there's just less and less incentive to be fiscally responsible with free-flowing credit.
- JamisonM 6y ago
  The idea that lots of companies and banks were over extending themselves seems unsupported, I think that large corporations were sitting on record cash stockpiles when this hit, no? Also there is no talk of a bank bailout, the banks are solvent in spite of this crisis right now. Seem like the "cheap money is good" argument is actually stronger here, the real wage gains over the cheap money period insulated a lot of people against the slow roll out of support because they were in better financial positions than they would be otherwise. Airlines are a good example of underlying issues exposed by the crisis, but airlines are a quite small part of the economy and are notoriously poorly run, it certainly has exposed them!
  - hardwaresofton 6y ago
    > The idea that lots of companies and banks were over extending themselves seems unsupported, I think that large corporations were sitting on record cash stockpiles when this hit, no? Also there is no talk of a bank bailout, the banks are solvent in spite of this crisis right now. Have you followed what the federal reserve has been doing in the last few months? - 1% federal rate cut (the maximum cut during 2008 was 0.5%) - UNLIMITED QE (this has never happened before) - Purchasing of fallen angels (companies which recently had bonds downgraded to junk) - Purchasing junk bond ETFs Also, have you been following the amount of downgrades on corporate debt? Did you know that the airlines that are now asking for bailouts did leveraged (IIRC) stock buybacks with most their profits over the last decade? Buybacks are similar to dividends, but doing them with borrowed money or without sound cash reserves is fiscally irresponsible. It is a fact that companies and banks were extending themselves, the proof is in the evaporation of bond yields and the collapse of the credit market, which is what the fed is responding to. Despite all this, there are banks that are seeing 45%+ profit losses -- JPM is one of the biggest (definitely too-big-to-fail) banks and saw a 69% profit loss. > Seem like the "cheap money is good" argument is actually stronger here, the real wage gains over the cheap money period insulated a lot of people against the slow roll out of support because they were in better financial positions than they would be otherwise. What are you talking about? I don't think I understand this argument, are you implying that real wages have grown significantly enough to protect the regular house hold? I can't read this any other way so I'll assume you are, and leave you some numbers on inflation-adjusted hourly wage growth versus productivity growth[1]. Real wage growth has not grown enough to keep families afloat, otherwise we wouldn't need helicopter money[2] except for the most fiscally irresponsible households. > Airlines are a good example of underlying issues exposed by the crisis, but airlines are a quite small part of the economy and are notoriously poorly run, it certainly has exposed them! Commercial aviation accounts for 5% of the US's GDP[3]. This is not a small amount. [0]: https://edition.cnn.com/2020/04/14/investing/jpmorgan-earnings-coronavirus/index.html https://edition.cnn.com/2020/04/14/investing/jpmorgan-earnin... [1]: https://www.epi.org/productivity-pay-gap/ https://www.epi.org/productivity-pay-gap/ [2]: https://en.wikipedia.org/wiki/Helicopter_money https://en.wikipedia.org/wiki/Helicopter_money [3]: https://www.airlines.org/data/ https://www.airlines.org/data/
danans 6y ago
> A lot of this boils down to having a better understanding of uncertainty and probability, especially in terms of being non-naive when it comes to extreme volatility and risk. After the statistical basics (don't confuse power-law distributed phenomena for normally distributed phenomena), a lot of what Taleb seems to prescribe boils down to simple skepticism of modeling the real world with games, which he describes as the Ludic Fallacy [1] https://en.wikipedia.org/wiki/Ludic_fallacy https://en.wikipedia.org/wiki/Ludic_fallacy The most entertaining narrative he conjures is the contrast between "Dr John", a mathematically oriented scientist, and "Fat Tony", a clever everyman, and how Dr John gets fooled about the odds of a game of coin-flip that has so far come up with 99 heads and no tails, asserting each flip must be IID at 50-50, but Fat Tony sees the reality: that the coin is rigged.
- fpoling 6y ago
  That rigged coin story is quite known, but Taleb’s account is most entertaining, https://mobile.twitter.com/fpoling/status/929410947713728513 https://mobile.twitter.com/fpoling/status/929410947713728513

hardwaresofton 6y ago

You don't even have to be a genius -- everyone expected the market to collapse, ~10 years of a low not-QE-but-definitely-actually-QE federal funds rate means a lot of companies and banks with access to that credit were over extending themselves. The financial system is cyclical -- funds like Berkshire Hathaway were starting to sit on more and more cash since last year. Even if you did nothing but follow their movements you would have been tipped off to the upcoming downturn. The consensus was that a crash was overdue, the question was just what was going to cause/trigger it. Also, disregard when pundits, government figures and central bankers say that this crash happened to an economy that was "doing great just a few months ago" -- it's just like 2008, the problems were there, they were just uncovered by COVID-19. Years of cheap loans, lax regulation, and lack of financial prudence means over-leveraged companies were taking risks they shouldn't have been, and all it took was one or two months of projected lost revenues for liquidity to implode. We're not even talking about restaurants who might run super tight margins here, we're talking about huge banks, institutions and large companies. Take the airlines for example, years of record profit and a clear view of what 9-11/H1N1/Ebola did to travel, yet no rainy day fund. And the risk COVID-19 caused was absolutely not unknown. We've had SARS, MERS, H1N1, Ebola all come through, businesses have had plenty of chances to consider insuring themselves or making themselves resilient -- there's just less and less incentive to be fiscally responsible with free-flowing credit.

JamisonM 6y ago
The idea that lots of companies and banks were over extending themselves seems unsupported, I think that large corporations were sitting on record cash stockpiles when this hit, no? Also there is no talk of a bank bailout, the banks are solvent in spite of this crisis right now. Seem like the "cheap money is good" argument is actually stronger here, the real wage gains over the cheap money period insulated a lot of people against the slow roll out of support because they were in better financial positions than they would be otherwise. Airlines are a good example of underlying issues exposed by the crisis, but airlines are a quite small part of the economy and are notoriously poorly run, it certainly has exposed them!
- hardwaresofton 6y ago
  > The idea that lots of companies and banks were over extending themselves seems unsupported, I think that large corporations were sitting on record cash stockpiles when this hit, no? Also there is no talk of a bank bailout, the banks are solvent in spite of this crisis right now. Have you followed what the federal reserve has been doing in the last few months? - 1% federal rate cut (the maximum cut during 2008 was 0.5%) - UNLIMITED QE (this has never happened before) - Purchasing of fallen angels (companies which recently had bonds downgraded to junk) - Purchasing junk bond ETFs Also, have you been following the amount of downgrades on corporate debt? Did you know that the airlines that are now asking for bailouts did leveraged (IIRC) stock buybacks with most their profits over the last decade? Buybacks are similar to dividends, but doing them with borrowed money or without sound cash reserves is fiscally irresponsible. It is a fact that companies and banks were extending themselves, the proof is in the evaporation of bond yields and the collapse of the credit market, which is what the fed is responding to. Despite all this, there are banks that are seeing 45%+ profit losses -- JPM is one of the biggest (definitely too-big-to-fail) banks and saw a 69% profit loss. > Seem like the "cheap money is good" argument is actually stronger here, the real wage gains over the cheap money period insulated a lot of people against the slow roll out of support because they were in better financial positions than they would be otherwise. What are you talking about? I don't think I understand this argument, are you implying that real wages have grown significantly enough to protect the regular house hold? I can't read this any other way so I'll assume you are, and leave you some numbers on inflation-adjusted hourly wage growth versus productivity growth[1]. Real wage growth has not grown enough to keep families afloat, otherwise we wouldn't need helicopter money[2] except for the most fiscally irresponsible households. > Airlines are a good example of underlying issues exposed by the crisis, but airlines are a quite small part of the economy and are notoriously poorly run, it certainly has exposed them! Commercial aviation accounts for 5% of the US's GDP[3]. This is not a small amount. [0]: https://edition.cnn.com/2020/04/14/investing/jpmorgan-earnings-coronavirus/index.html https://edition.cnn.com/2020/04/14/investing/jpmorgan-earnin... [1]: https://www.epi.org/productivity-pay-gap/ https://www.epi.org/productivity-pay-gap/ [2]: https://en.wikipedia.org/wiki/Helicopter_money https://en.wikipedia.org/wiki/Helicopter_money [3]: https://www.airlines.org/data/ https://www.airlines.org/data/

danans 6y ago

> A lot of this boils down to having a better understanding of uncertainty and probability, especially in terms of being non-naive when it comes to extreme volatility and risk. After the statistical basics (don't confuse power-law distributed phenomena for normally distributed phenomena), a lot of what Taleb seems to prescribe boils down to simple skepticism of modeling the real world with games, which he describes as the Ludic Fallacy [1] https://en.wikipedia.org/wiki/Ludic_fallacy https://en.wikipedia.org/wiki/Ludic_fallacy The most entertaining narrative he conjures is the contrast between "Dr John", a mathematically oriented scientist, and "Fat Tony", a clever everyman, and how Dr John gets fooled about the odds of a game of coin-flip that has so far come up with 99 heads and no tails, asserting each flip must be IID at 50-50, but Fat Tony sees the reality: that the coin is rigged.

fpoling 6y ago
That rigged coin story is quite known, but Taleb’s account is most entertaining, https://mobile.twitter.com/fpoling/status/929410947713728513 https://mobile.twitter.com/fpoling/status/929410947713728513