Taleb's strategy is reasonably obvious, which he admits. He buys options that are way out of the money and hopes for volatility. His theory, which someone needs to run the data to check, is that options far out of the money are significantly underpriced. The players who price options based on a normal (Gaussian) distribution based on the Black-Scholes model of market behavior will, Taleb claims, systematically underprice options far out on the curve. His strategy exploits this. Whether that's a correct analysis is tough to check, because you have to look at decades of data to see enough outlier events, i.e. big crashes. As Talib admits, his funds bleed in boring years, then make money during crashes. There's another problem. If you buy options that are way out of the money at a low price, can your counterparty pay up if the unlikely event happens? The AIG fiasco, the CDO market collapse, and further back,"portfolio insurance", indicates that the answer is sometimes "no".

Enjoyed reading your piece on Taleb. While I'm a big fan of his books (which are more philosophy books than anything) and generally subscribe to his views, it's always good to hear the other side. The question left unanswered by your piece, however, is just how badly did he do in the down years? If he went up 60 percent in 2000 and 100 percent just last year then he could theoretically have decades of small declines and still be well ahead of the historical average. He has always described his strategy as being willing to lose pennies at a time. I would guess since he shuttered the first hedge fund that the losses were pretty bad (maybe dimes and quarters), but still, it would have helped to know. Is that data not public? Is there not an investor available to leak a few reports?

The subject of Taleb is simple: real life can't be modelled. Suckers think it can. Don't be a sucker. In other news, registering for this site is like trying to crack a Defense Dept computer. It's only a blog. Get over yourself.

It sounds like envy to me.... Taleb was not outstanding during the "normal" periods of market activity, nor was I. My returns prior to 1987, 2000 and 2008 were somewhat average. Not a shining star and many times ridiculed and scorned by many of my peers. I even had a few of my clients whom I was advising drop me in and guess what, they went with Madoff. Imagine that...... after all the money I made for them during the dot-com bust, they called me an idiot and took their money to a genius. I am happy for them. The message that NNT sends is..... "Go ahead and cross the quiet intersection, just don't do it with a blind fold on..." Pretty simple stuff, if you ask me, quite similar to the advice that my grandmother would give... Best regards, Econolicious

I have read the article and the Black Swan book and I really do not understand Mr Gimein's argument. How you can refer to someone who not only survived but flourished during the three biggest market crashes of our generation as "wrong" is quite simply beyond me. What does it matter if he had indifferent performance during the "in-between" years when the times he got it right he got it so massively right that he could retire instantly?! Ask the average investor whether they would like to make "$35-40 million" and then have ten or fifteen years "without much success" investment wise I think they would take it. The point that the author of this article seems to miss and is a central tenet of the Black Swan philosophy is that failure is a necessary component to benefiting from these unusual, "asymmetric outcomes" that NNT has succeeded in benefiting from not once, not twice but 3 times (!) in 20 years. Do you think he might be on to something?! And while the investment advice is limited in the Black Swan (it doesn't claim to be an investment book anyway) it does lay out the central idea of keeping around 80% of your assets in safe/conservative investments, while spreading the other 20% across the riskiest investments you can find, namely private equity that can provide a huge return on a relatively small initial investment.

The main point of the book however is to simply raise the reader's conscientiousness in all walks of life, from how you gauge investment risk, to what you choose to do for a living, to how you think about terrorist attacks or work projects. It teaches you not to put your trust in the hands of the so-called "experts" with their fancy models that got us into this mess in the first place.

I think what is missing from this article and the analysis of this strategy is that it is not meant to be a stand alone wealth maximization strategy. Nassim would not tell you to invest all of your money in these entities. I think what he would tell you is that, these strategies can work extremely well as a hedge against the majority of hedge fund strategies that either explicitly or implicitly are selling the convexity that he is acquiring. That said, as volatilities are at historically high levels, perhaps it's better to enter the strategy in a lower vol environment. In essence, that is all he is doing..... he is going long volatility, particularly the wings.

did you read the black swan? on page 96 of the hardcover edition is subheading titled BLEED OR BLOWUP. in this part of the chapter, his fictional character nero goes on to explain his trading style:

"His premise was the following trivial point: some business bets in which one wins big but infrequently, yet loses small but frequently, are worth making if others are suckers for them and if you have the personal and intellectual stamina...a strategy he called 'bleed.' You lose steadily, daily, for a long time, except when some event takes place for which you get paid disproportionately well. No single event can make you blow up [that is lose more than you considered possible], on the other hand—some changes in the world can produce extraordinarily large profits that pay back such bleed for years, sometimes decades, sometimes even centuries." [emphasis his] p. 97

what, mr. gimein, is the title of the chapter? LIVING IN THE ANTECHAMBER OF HOPE, of course. and what could that possibly be about? it's probably not about the character drogo from THE TARTAR STEPPE, who becomes "inebriated" by the hope of being a hero in a battle against the tartars at the edge of the desert—a desert no one has crossed. drogo spends his entire life putting his return to society on hold:

"At the end of the novel we see Drogo dying in a roadside inn as the event for which he has waited all his life takes place. He has missed it." p. 93

and the next subheading THE SWEET TRAP OF ANTICIPATION:

"I presented the Black Swan as the outlier, the important event that is not expected to happen. But consider the opposite: the unexpected event that you very badly want to happen. Drogo is obsessed and blinded by the possibility of an unlikely even; that rare occurrence is his raison d'être." [emphasis his] p. 93

now to quote you:

"In his books Taleb presents a wealth of examples of how prone we are to discount the unexpected and unlikely, but what is notably missing from The Black Swan are examples of just how likely we are to overestimate the chances of unlikely events when they are presented to us under a spotlight. Taleb is, of course, right that we fail to anticipate what we are not looking for. But we also overanticipate when we are looking too hard for the outliers. Lottery players overvalue their chances of winning $10 million, and horse bettors put too much money on 100-1 long shots. People who watch the local news too avidly believe there is a child kidnapper around every corner, and followers of Taleb assume that every time they pass a dark alley, catastrophe is about to pop out with a bloody knife." [bold mine, of course]

now let me ask again: DID YOU READ THE BLACK SWAN?

what was that...is that pie on your face...bet you didn't expect that!

journalistic integrity rating: 0

You're right to be embarassed to be arguing against Nasim Taleb. His primary argument is that unexpected/catastrophic events (like the 1987 crash, the Dot-com crash and the 2008 crash) are far more common that most people think. A cool $10M to $30M every decade or so? Not bad in my book. How is your portfolio looking these days? Similar? I didn't think so.