This is the second part in a series of two,
summarizing the most important takeaways from: Antifragile - Things That Gain From Disorder, written by Nassim Taleb.
Last time, I left you with the following cliffhanger. There's another way to detect what is likely to be fragile,
and what is likely to be antifragile, and it's determined by the so called Lindy effect.
(But more on that in the second video)
I know, I know. That was really mean. It even makes the cliffhangers of Lost pale in comparison.
I can only imagine the horrors you must have been through.
Seriously!
I guess, the only way for me to make things right here, is to start out with what I promised in the last video.
Takeaway number 6: The Lindy effect
Pretend that you're the owner of a life insurance company.
Your business model is that you're paying $1 million if a person dies.
Who would you have paying the higher premium?
1. Lars Svensson, the 80 years old Swede, who is perfectly healthy.
Or 2. Johan Svensson, the thirty years old Swede, who is also perfectly healthy?
Given this data,
You would expect Johan to live longer than Lars, and therefore Lars would have to pay a much higher premium for his insurance.
Now, pretend that you're the owner of another life insurance company. This one has a different kind of business model.
It's insuring against books disappearing from the New York Times best selling list.
Which author would have to pay the higher premium?
1. The author of the book which has been on the list for 10 years, or
2. The author of the book which has been on the list for 10 months?
Well?
We realize that the situation is the exact opposite than from the first example.
The author of the younger book would have to pay the higher premium.
Why?
When it comes to non-perishable things, that which is old, is also that which is expected to survive the longest.
This is the Lindy effect.
The future is in the past.
If something has been around for, say ten years, we can probably expect it to be around for another ten.
If something has been around for a hundred years, we can expect it to be around for another hundred!
Things that have been around for a while are not "aging" like persons do, but rather,
aging in reverse.
In the first video, we discussed how to identify that which is fragile and that which is antifragile.
The Lindy effect is a great indicator for this.
If something has managed to survive for a long time, be it an idea, a habit,
a building,
technology, a book, or a
company, we can conclude that it's either robust or antifragile.
We can do this because time is the ultimate stressor.
Something that has survived time has necessarily also survived a lot of random events.
That which is fragile would therefore have gone extinct.
Here are three implications for investors:
Companies that have been profitable for many years should be valued higher than those that have been profitable for only a few,
everything else equal.
Fund managers with a long positive track record are typically a better choice than young superstars.
Betting against that which is fragile turns out to be an antifragile strategy, as
Nassim Taleb himself proved during the financial crisis.
In time, those who reaps small, known benefits, while exposing themselves to large, unknown
losses, will be the suckers. Take the opposite side of such a bet and you'll be a winner.
Warren Buffett says: "Only when the tide goes out do you discover who's been swimming naked."
Takeaway number 7: The green lumber fallacy
A guy named Joe Siegel (according to the story) was one of the most successful traders in a commodity called "green lumber".
The other traders couldn't understand how this guy was a success.
He didn't even know the most fundamental property of this commodity - that green lumber referred to freshly cut lumber,
not lumber that was collard green, which Yossi Joe thought.
The other traders went loco over this. How can such an ignorant person be a better trader than them?
The green lumber fallacy is a situation where we mistakenly think that some,
visible knowledge, is the key ingredient to success, when it's something else entirely.
Something less visible, less narratable.
Joe Siegel might not have been aware of the fact that green referred to freshly cut,
but for sure, he knew other things about the commodity.
Things much more relevant for being a great trader in it.
Nassim Taleb had a similar colleague when he himself was trading professionally.
The guy was the most successful trader at the department in Swiss Franc, the currency of Switzerland.
Yet he couldn't even point out on a map where Switzerland was situated!
He didn't know which languages they spoke there, and he had never visited the country.
Herein lies an important takeaway:
Humans care a lot about narratives.
If someone can't explain why they are successful in a field, like for instance, they state that they are great traders of green lumber, yet,
they don't even know what green lumber is, we don't trust them.
But reality doesn't care about narratives.
Reality only cares about getting things done.
And which factors that are causally leading one to become successful, can sometimes be hidden from us.
We judge people as ignorant when it's just us who are ignorant.
I remember one of my classmates back in school, when we were 13 or something.
He was into entrepreneurial projects and was building websites for different purposes. Me and
one of my best friends, kept talking BS about this guy, and
really questioned his abilities of reaching any kind of success, doing what he was doing.
The guy barely passed the tests in school. How could he possibly be a great entrepreneur?
We had to eat it all up when he sold his first website for about
$30,000, which was a buttload of money at the age of 13!
Clearly we were committing a green lumber mistake -
we were mixing up the skills necessary for getting the highest grades in school with the skills necessary to become a great entrepreneur.
Takeaway number 8: Less is more
Consider this statement:
"That guy clearly is a criminal! He has bad table manners,
he killed a lot of people, he has bad breath, and ...
and is also a poor driver!"
When looking at this example, which factor or factors do you think matter for the statement "he is a criminal"?
I would say it's number two.
Here, it's quite easy to identify what is signal, in other words what's important, and
what is noise, in other words, that which doesn't matter at all.
In reality, the separation of signal and noise isn't always as simple, unfortunately.
Data is plentiful because of connectivity, but data is toxic in to large quantities,
because more of it will be noise and only some of it signal.
The more data the lower the percentage of signal.
In other words: less is more.
If we are paying attention to the eye colors of the people around us when crossing the street, we might miss the big truck.
Did you log into your online brokerage account today to check the returns of your portfolio? Well, I did, and I was kind of pleased.
Then I had to remind myself - does this really matter? And the answer is of course ..
No, it doesn't.
The daily fluctuations of your portfolio are probably about
99% noise and only 1% signal.
That I made 1.47% in a single day in the stock market means nothing. I repeat: nothing.
It's important to consider this, because when we are making important decisions,
be it when investing, when choosing a partner, when buying a house, or whatever,
we want our choice to be based on signal not noise.
If the situation would have been the opposite, that I lost 1.47%, and
I decided to sell off some of my companies because, well, I don't want companies with negative returns,
I would have based that decision on 99% noise.
I would be much better off checking my portfolio once or twice every year for such a decision.
Again: less is more.
We check less often, but counter intuitively,
this gives us more information than checking frequently, as the information consists of more signal and less noise.
Many fund managers are suffering from this. They are reshuffling too often in their portfolios as a result of recent performance.
Here's what Warren Buffett thinks about rearranging in your portfolio:
"Don't do something, just stand there!"
In the last video, I talked about naive interventionism, which is when someone is interrupting in a system that works perfectly fine.
Information overflow is one thing that causes this.
You don't need to read the news every morning, or check the daily fluctuations in your portfolio to become a great investor.
Significant signals, the only ones that you should be acting on, always have a way to reach you.
Takeaway number 9: Via negativa
As mentioned in takeaway number 7 about the green lumber fallacy, finding causal relationships is often very difficult.
People want to know how to do something, but it's usually equally good (if not better) to know what NOT to do.
Subtraction is often more robust in regards to causality than addition is.
Remember Nassim Taleb's favorite example about the Black Swan?
"No amount of observation of white swans can allow the inference that all swans are white,
but the observation of a single Black Swan is sufficient to refute that conclusion".
Here are three additional examples:
Happiness. What makes you happy?
Now, what makes you unhappy?
Most people find it easier to answer the second question.
Happy, oh ..
friends & family, and ..
money perhaps?
Unhappy? Yeah!
I hate it when my boss is micromanaging me, when my kids aren't listening, when I back out or something because of fear,
having a hangover, feeling nauseous,
stupid politicians,
nagging parents, when my IPhone goes out at 50 percent battery because it's cold outside, getting wet socks, etc. etc.
Via negativa, we can improve our life a lot by removing the things that we dislike.
For instance,
I recently discovered that the only days when I feel down and a true lack of energy are
when I'm having a hangover.
So, I removed most such days by not getting shit-faced while partying anymore
(except during special occasions)
Not only is it easier to say what makes you unhappy, but it's usually easier to know what to do about it too.
Focus
Here's an interesting one.
Steve Jobs famously said this:
"People think focus means saying yes to the things you've got to focus on, but that's not what it means at all.
It means saying no to the hundred other good ideas that there are."
Medication. On the topic of naive interventionism, medication is probably ranked the highest.
Over medication plagues our society.
Exposing yourself to an unknown,
unlimited downside, for the sake of a known, small upside, is not a great strategy.
Especially when dealing with your greatest asset, your body.
Avoid all medication and all doctor visits, except for truly severe cases.
Oliver Wendell Holmes and 19th century poet and physician:
"If all medications were dumped in the sea, it would be better for mankind, but worse for the fish."
And here's how Nassim Taleb expresses it: "If you want to accelerate someone's death, give him a personal doctor.
This might be the only way to murder someone while staying perfectly within the law."
Take away number 10: Optionality and the potential pitfalls of wealth
Consider what happens when you gain success from a lot of wealth.
There's an interesting property here, you now have more to lose than to gain, or,
in other words, you've become fragile.
It's the opposite of the barbell strategy from the last video.
Excess wealth, if you don't need it, is a heavy burden.
Beyond some level, it forces people into complications of their lives.
Wealth without true optionality, being able to judge whoever you want, spend your time however you want, with whomever you want, is
wealth not worthy of pursuing.
And of course, wealth used right can also be an agent of optionality.
It's difficult to go heli-skiing,
eating at a Michelin restaurant or buying VIP tickets to the next UFC event without a lot of money.
Plenty of people are poor against their initial wish and only becomes robust by spinning a story
that it was their choice to be poor, as if they ever had the option.
One convinces himself that the grapes he cannot reach are sour.
So you want money, but you also want optionality to grow with your wealth.
A top executive at some large company usually have a lot of money, but does he really have optionality?
I would argue no, he doesn't.
His wealth has only complicated things.
He's not free with his time because he's expected to show up in New York next Monday, Buenos Aires on Wednesday and
Tokyo on Friday, where he will also spend the weekend.
He's not free with his opinions because criticizing the CEO of the company,
may result in him losing the job, and that would be problematic, as his lifestyle is dependent on that income.
Three kids who want to go to Harvard at some point, a wife who's
a shopaholic (and probably married him to satisfy that need) a large mortgage on four different luxury vacation homes ...
Yeah, you know the drill.
Greed is antifragile to income. This is called the treadmill effect.
Instead of the top executive situation, strive for circumstances of true fu money.
Link in the description for a summary of the book with the same name, by the way.
Nassim Taleb definition of it is:
"A way of achieving independence and the ability to only occupy your mind with matters that are of interest to you."
This is the reason why I am striving for wealth myself: Have a fat wallet,
not too many possessions that are tying me down to one place geographically,
being able to say f*** off to anyone (but ending up not having to do so too often) and
being able to spend my time however I want.
Not how a boss wants, not how a client wants, how I want.
And that's it for Nassim Taleb's Antifragile! Here's the recap:
That which has been around for a while is per definition
robust or antifragile, because it has survived the ultimate stressor - time.
There's more than meets the eye when it comes to causality.
Humans care about narratives, but reality only cares about results and getting things done.
Less is more in many instances, because less carries more signal and more carries more noise,
in relative terms, of course.
Knowing what not to do is more robust than knowing what to do.
Money mishandled causes more problems than perks.
Optionality should also follow, otherwise, you can never get true financial freedom.
Really really awesome book. If I have an affiliate link in the description of this video, use it to buy the book immediately.
Also, thank you for watching the full video!