Something that occured to me, how did Jim Chanos got rich? I believe he got rich by going long an equity position, namely the shares of his investment partnerships, and there was a lot of positive convexity there because of the fee structure. His actual short selling doesn't make that much money, the returns that I was able to dig around in web show him that he doesn't make much but he still offers something invaluable to investors, the ability to hedge against a collapse in the market while not losing much during up years (a free/low cost market 'hedge') http://www.valuewalk.com/2015/11/jim-chanos-return-model/ So, if you are not careful about how you look at him, you would think that being a bear/pessimist still enables some people to get rich and hence there is no need to fix excessive pessimism, and be encouraged to engage in more short selling. Not true, Chanos is rich because he got optimistic one day and said 'Im going to open a business and charge fees for a valuable service' that is an optimistic bet, he made most of his money in a long! So even the biggest bear around could only get rich by becoming optimistic and designing/creating/finding a positive convexity bet. Its just too hard to do that by shorting/being a bear. That is, by thinking like the average Wall Street asshole
If I'm math is right, here are the returns after fees of $100 invested with him from 1985-2005 So he is an interesting way to protect a portfolio against a market decline and improve risk adjusted returns, yet his actual short selling doesn't produce much in profit
The S&P500 total return index looks like was up 10x in that data period, so being short during that period and still only be down 25% is a huge sign of skill by Mr. Chanos, yet if the average trader/investor does not possess the fee structure that he has (which he believed in by becoming optimistic and being a bull on an equity position), they will never get as rich as him
What is interesting is that these typical WS assholes usually get rich when they drop that act and get optimistic. One day they wake up and think 'maybe I can work at Goldman Sachs and earn a big bonus', they will get in touch with contacts, apply for internships, jobs, etc. And then one day they get hired, earn a big salary and an even bigger bonuses. Still, they usually don't realize that it was the positivity that made them structure/design/find this little convexity bet (assymetrical risk-reward 'trades' or choices) is what made them rich. At the very least, the positivity (the little that they had) made them try, seek contacts, etc. Had they acted like they typically act and thought 'this won't work, its ridiculous to think I could get in, I got no engineering degree, etc etc' they would have destroyed that little convexity trade and ruined their wealth. But they still do that in many other ways after they are hired, they will say 'bitcoin is a stupid bubble' 'the stock market is too high' 'India? No fucking way I'm investing in India' 'China is a house of cards'. As a result they still remain UNBALANCED in their positive negative balance. Now, if they grow aware that such balance exist and its important to be calibrated, they can perhaps tone down the skepticism and get more positive. Same thing with an overly positive silicon valley entrepeneur
The Silicon Valley folks also tend to get saved when they grow a little more skeptical (as opposed to being a perma kool aid drinker) and sell their shares, usually in those private placements, IPOs, offerings etc. They get to keep some of their wealth if/when their companies blow up. Perhaps that's what is going on/happened at SNAP. The people at the top grew a little skeptical and they IPOed their company, enabling them to cash out. Now it looks like the company in a downward spiral but the owners will still walk away with a lot of cash. So, good lesson there of someone balancing their bias in a way that protects them. The opposite of that is that multi-billionarie from AIG that bagheld all the way down and lost the vast majority of his networth
Interesting finding in my put buying strategy research: "It is somewhat surprising that period (b), which includes the October 87 crash, was not the worst month for selling puts – in fact, it was only the forth worst after periods (a), (c), and (e). Even though the decline in the underlying was the largest (-14%) over period (b), puts were selling at unusually high prices at the beginning of the period (as evidenced by the corresponding ATM volatility in Table 3). The market was very volatile and put premiums were high because the S&P 500 had already fell substantially in the previous month. In periods (a), (c), and (e), the returns in the underlying were less dramatic (-11%, -10%, -9%). However, they happened after relatively calm periods, when puts were inexpensive by historical measures."
I just finished listening to the book "The Dao of Capital" by Mark Spitznagel, I found it a very good book, much better than I thought it would be. One of the things that struck me is how much of a subtle diss to Taleb he mades through the book. Two instances And then in the final chapters (the ones about investing), he goes on to show the results of his put buying back test. It pretty much confirms that systematically buying puts is bad, its supposed to be saved for special situations. Spitznagel says it should be saved for when the Tobin Q ratio is high (although he calls that ratio something else)
Another diss. The subtle message is 'I dont invest like Taleb, he doesnt run my fund so dont worry, my fund wont fail like his. invest in mine and it will be fine'