It's highly efficient in high risk cycles and treads water in low risk cycles, as we're moving from low risk to high risk it has value. Taleb has been through more extreme sigma events than most people in life, so he understands when they occur they are highly rewarding with limited downside, but you have to dodge the noise between events. As most people in life stay around the neutral distribution they prefer the medium risk fully exposed route, it generates income when it works and loses you your shirt when it doesn't. But you'd have to understand extreme events to see the difference, and most peoples concept of extreme is a Caribbean holiday in the sun for those that know. Conclusion, it's all about the timing, the more patient you are the more extreme the returns.
Not all products have strong correlation when the markets fall apart. One way to gain a little protection is to get long volatility when gaining long exposure is cheap (such as now). Kinda like driving a car...there are times when you can go above the speed limit and there are times when you should be driving well below the speed limit. A good driver does not need speed limits. He or she knows the performance / physics of his or her vehicle and can adapt to road conditions in order to minimize travel time as much as possible (or maximize efficiency if that's his / her goal). Investing is similar. A good investor does not need to follow rules for capital allocation. He or she has a good feel for how much capital (speed) is prudent to risk at any given time.
I am a fan of Taleb. I read his book on Antifragile. Very thought provoking, very thoughtful and helpful to me. For me how to trade options with the understanding of convexity and optionality is eye opening. Martinghoul and Maverick74 both mentioned the nonlinear nature of options in their old posts but the concept went over my head until I read his book. To me it is more important that arguing about the risk free side of his barbell strategy. Cheers.
I agree, Antifragile is great. I think Book Six (The Medical Chapters) is outstanding. I just feel that Taleb could be doing a better job at explaining some things
He wrote with a chip on his shoulder for some reason. I just ignored those flaming statements against the establishments and tried to understand the wisdoms of what he wrote. I read and enjoyed your posts. You had some out of the box thinkings too. Regards,
Anyone remember Taleb's hot tip: every trader should own deep OTM puts on US bonds? He was on CNBC or Bloomberg I remember: "You buy puts, every month. With a small amount. Then next month, again with a small amount. And you keep repeating. Every month. Very simple. America is bankrupt, and when bonds crashing you will make very very big return!!!! Simple!" There's your barbell. You lost 1% x 60 months = -45% total return and on the flipside of the barbell you made 0% on your 90% worth of low-risk asset. Great success! How many naive traders have lost a good chunk of their nest-egg following this idiot?
No, that is not what he said. Almost all his OTM structures are financed. I do this all the time, in fact almost every month. You lose maybe 5% and possible make 50 to 100 times that if you are right. It's all about asymmetry. I do agree with you though that retail people should not do this as most retail people don't even know what asymmetry means.
In my experience you lose 5% with a probability of 99% and make 100% with a probability of 1% giving you an expected value of less than 0. It's not about understanding assymetry, it's about finding mispriced securities which is far harder for us mere mortals than you let on (I'm purposely goading you to provide such an example, if it isn't obvious!)