I was a trader in 2008, and some of the lessons I learnt and events I witnessed will stay with me throughout my life.
And it was precisely then that Nassim Nicholas Taleb captured public imagination, with his two books – “The Black Swan” and “Fooled By Randomness” which suddenly brought finance terminology into the mainstream. It was everywhere, with newspapers – including tabloids, online columns, and not to forget advertisements in London Tube Stations all exalting these books and Taleb as the only sane voice amongst a group of people constantly trying to play down an impending crisis. Of course, Ben Bernanke’s irrational exuberance with comments such as the one below didn’t help.
“The risk that the economy has entered a substantial downturn appears to have diminished over the past month or so”
Ben Bernanke, June 10, 2008
I bought those books too, to understand what Taleb had to say and why he had suddenly captured popular imagination. His books were an interesting read, and rather gripping too, even though I felt he was relying too much on anecdotes and analogies.
I am of the opinion that Taleb’s assertion’s were perhaps intentionally sensational, since he had to sell books.
Let’s view some of his analogies and assertions.
Perhaps his most famous analogy of all is the Turkey analogy - a turkey is fed for 999 days leading up to Christmas and slaughtered on the 1000th day. We are like the turkey, with statisticians leading us to believe that each day the turkey lives, it’s well on its way to a long life. And each day a hedge fund lives, it’s closer to a blowup. While I agree that statistics can be manipulated by unscruplous people to make ’projections’, Taleb’s blanket assertions are equally bad.
Most blowups in the recent past such as Nick Leeson/Barings Bank and Jérôme Kerviel/Société Générale, have been the result of illegal trading. So it’s not so much a turkey, as it is the 999 day old family dog who got run over by a drunk driver on its 1000th day. The end result is violent death, the reasons however are vastly different.
If anything, such instances call for tighter business controls in a trading environment rather than paranoia about swans and geese.
Secondly, Taleb seems to be a huge proponent of buying out-of-the-money options, but sadly, both his trading record as well as other academic research does not indicate that this is a very sound strategy. Oleg Bondarenko in his paper “Why are Put Options So Expensive?” states:
Simple trading strategies that involve selling at-the-money and out-of-the-money puts would have earned extraordinary profits.
Taleb is by all indications a wealthy man, but unlike Warren Buffett or Seth Klarman or Benjamin Graham, his wealth is highly unlikely to have been earned from investing. I would take the opinions of such a person on investing with a generous pinch of salt. In that respect, he is closer to a Darren Winters than a Benjamin Graham – one who makes money from speaking about investing rather than by investing.
