Optionality, Bi-Modal Strategy and how to be squeezed.
Lessons learned from Nasim Taleb’s ‘Antifragile’
The option is an agent of anti-fragility.
Anti-fragility = more too gain than to lose = more upside than downside.
If you make more when you are right, than you lose when you are wrong, you will make more over time.
Magnitude of correctness, not frequency.
Freedom is the ultimate option.
Asymmetry — big upside, small downside.
Likes dispersion — it does not care about the average outcome, only the favourable ones since the downside is capped and does not count beyond a certain point.
Barbell / Bi-modal strategy
Decreasing downside is the first step to anti-fragility
Risk management is of the utmost importance.
A combination of extremes kept separate; with avoidance of the middle. It is not necessarily symmetric: it is just composed of two extremes, with nothing in the centre.
Extreme risk aversion on one side and extreme risk loving on the other — rather than “moderate” risk.
Moderate risk can be subjected to huge measurement errors
The barbell/bi-modal strategy, by design, reduces the downside risk — the elimination of the risk of ruin.
90% of funds in cash (protected from inflation) and 10% very risky/maximally risky securities — you cannot lose more than 10%, while exposed to huge upside. Taps into “power law distribution”. “Very risky/maximally risky securities” does not mean “blind-investing” — consideration and analysis to select securities which are most likely to generate a positive return.
Someone with 100% so called “medium risk” has the risk of total wipeout due to measurement errors.
More upside can come from reducing the downside (emotional harm) than by improving things in the middle
Yiddish proverb: “Prepare for the worst, the best can take care of itself.”
Seneca: he had a life of extreme activity and adventure; followed by a philosophical withdrawal to write and meditate. Pure action followed by pure reflection. Barbell strategy applied to life.
How to be squeezed…
A squeeze occurs when people have no choice but to do something, and do it right away, regardless of the costs.
Squeezes become non-linearly costlier as size increases.
Size hurts you at times of stress; it is not a good idea to be large during difficult times.