Have you ever spoken to someone who is so much smarter than you that you have no real understanding of where they are coming from.Sometimes that smart person realizes how far in under his head (as opposed to in over) but still doesn't know how to dumb it down enough.
I had this thought as I watched Nassim Taleb get interviewed on the network a few minutes ago.
I'm not casting a stone because the same thing would happen to me were I to ever meet him.
18 comments:
TORTURE
I am still trying to figure out what "change" means. Stupid me.
T
Change means whatever you want it to.
I was kind of mystified by Taleb's "investment" strategy
- basically 95% cash, and 5% long OTM options
with the level of volatility now, buying options are very expensive, with the attendant strong time decay headwind to overcome...
I am having a hard time seeing his strategy as anything more than gambling...
It's precisely gambling. But he believes he has an edge. That edge is that far OTM options are way underpriced because they do not anticipate the black swan event. When it hits, pay day.
It is most certainly a hard discipline to follow (too hard for me).
I would like to read his book to see what he has to say vs. the pitiful interview
Bill - they may have been underpriced when the vix sat at <15 for so long, but now sitting at 60+, black swans are expected daily ?
As Roger said, would have been nice to have interviewers who could have made something out of his (our) time.
and isn't "expecting" a black swan event an oxymoron ?
Taleb's strategy is exactly the same as those travelers who buy insurance via those little kiosks in the jetway as you walk towards your plane.
For $10 bucks, you're covered. (Even though theexpected risk is worth 2.50.)
I've read both his books, and listended to interview Roger had linked last week. He does not believe the statistical basis for interpreting the market is valid, and backs it up with data. He also believes that that bad things can happen with no warning. His view of the world has been substantiated by recent events. That does not mean he has a formula for beating the market. His approach is to capitalize on the infrequent catastrophic occurance. Roger, the world does not adopt his view because we think in terms of linear, cause and effect relationships. We practices exponential relationships which are can not be predicted with historical data.
Sam
I read Tabeb's book "Fooled by Randomness," and what struck me most about it was how arrogant he is. It was a long-winded rant about how most people don't plan for large market swings, and how smart he is for capitalizing on unexpected moves.
He's probably a smart guy, but he's so consumed with his own intellect that he's intolerable.
Brian Greene, a theoretical physicist, is both very smart, but possessive of extraordinary ability to make his thinking accessible to mere mortals.
I believe the difficultly for some of those extraordinary thinkers is to reduce something that is highly conceptual into something that is concrete that mere mortals can understand. If you were to break down the population, most people tend to be more concrete in their thinking. (just look at the distributions in the population on Meyers/Briggs scores/ The point about linear v. spatial thinking describes it well.
I'm certain that he bought his options when they were cheap. My greatest regret this year was having bought in Apr SEP DIA 125 puts. Last year I bought in Apr MTG 60 puts. Oh, I made money on both, but I left so much money on the table it would have collapsed.
Sigh....There's a big difference among having a good idea, a good entry and exceptional position management. I do the first two pretty well (not to sound arrogant, but it was hard won and expensive at times!) but still work on managing the position.
Oh, to be so smart as that!
Roger,
Largest 2 day decline since 1987 and no comments?
Are you getting use to the volatility?
To me this just feels like meandering :)
I really enjoyed Taleb's books--arrogant or not, he has important ideas to share. Interestingly, there was a Bloomberg article on October 14th where Taleb said the current crisis is a "White Swan'', not a Black Swan, because it was something bound to happen. Indeed, many didn't know WHEN the bubble of easy credit would catch up to the markets, but were expecting it nonetheless. What would a Black Swan look like in this environment? Maybe a further 50% decline...maybe a coup d'etat in Canada...or maybe all the government programs will work! Now that would be a real black swan!
(thanks Roger for a great blog)
Hi Roger,
Roubini has been posting about the recent sucker's rally and still claims we will see SP500-720 based on the severity of the recession. Kindly advise your thoughts?
On a side note did you ever put back on your SDS position?
The following is an excerpt: "And in the meanwhile the brief bear market sucker’s rally in the equity market has lost its steam and U.S. and global equities are starting to plunge again. As I argued for the last few weeks this was a bear market rally and markets could not defy the laws of gravity: a slew of ugly and worse than expected macro news, earnings news and financial news was bound to take a toll on equities and other risky assets. And now, after a brief rally markets are starting to plunge again. For 2009 the consensus estimates for earnings are delusional: current consensus estimates are that S&P 500 earnings per share (EPS) will be $90 in 2009 up 15% from 2008. Such estimates are outright silly and delusional. If EPS fall – as most likely – to a level of $60 then with a multiple (P/E ratio) of 12 the S&P500 index could fall to 720, i.e. 20% below current levels; if the P/E falls to 10 – as possible in a severe recession, the S&P could be down to 600 or 35% below current levels. And in a very severe recession one cannot exclude that the EPS could fall as low as $50 in 2009 dragging the S&P500 index to as low as 500. So, even based on fundamentals and valuations, there are significant downside risks to U.S. equities."
That was an awkward interview indeed. I think the woman on cnbc didn't know how to relate to him. I have been an asset allocator for most of my investing life (US large cap, US small cap, Intl, Reits, Fixed Income). Now I believe I drank the Kool-Aide that asset management and brokerage firms spew. I think Taleb is right is to a degree. If you invest 95% of your money in fixed income (muni or laddered cd's) and bought at the money calls on the SPY each year, I bet you would have outperformed the SP500 over the past 50 years. I have no back testing data to prove this but I believe this to be true.
The stock market has become a big ponzi scan that destroys the wealth that we work so hard for each day.
Anyone agree?
Change menas a new economic model that stresses sustainability, saving and production.
Repubilcans call this "socialism" because the current economic model of print money, skim some off the top, lend, and consumption debt is dead. It was called Reaganomics.
i read taleb's black swan book a few months ago. i found it fascinating and i think i understood most of it. the biggest takeaway is that the black scholes option pricing model misprices options at the extreme because black and scholes assumed that stock price movements are distributed in a normal gaussian curve. taleb spends a lot of time in the black swan explaining that the world really does not conform to gaussian normal distributions. i have been reading "against the gods" by peter bernstein and was startled when he mentioned (page 148 of the 1998 soft cover edition) that "the chart of monthly changes does have a remarkable resemblance to a normal curve. but note the small number of large changes at the edges of the chart. a normal curve would not have those untidy bulges." taleb's approach seeks to benefit from "those untidy bulges"--that is, the outsized events that lead to mispricing of options for exceptional events.
in the book, taleb pretty much states that one cannot predict the future, and therefore cannot predict black swans. for example, he talked about growing up in lebanon and everyone's surprise when civil war broke out and everyone's assumption that it would end soon--and it never really did.
with that in mind, let me offer not a prediction but a potential "black swan" that i have been pondering for a few months. credit default swaps now price the likelihood that the united states repudiates its debt sometime in the next five years at a higher level than the probability that some form of damage occurs to my house. (several sources indicate that cds on us treasuries are currently priced around 40 basis points--that is more than i pay for homeowners insurance.) perhaps the cds is currently overpriced, but ponder what happens if the us repudiates its debt. (hint: you really don't want to think about it!)
--gjg49
Black-Sholes option pricing is a joke for almost any small-cap stock
even in a fairly stable year. You can check it for yourself by taking 10 stocks off the S&P Small cap 600 list, get the Black Sholes calculated prices on the leaps & check them a year later. Even operating in an ideal market, Scholes' accuracy leaves so much to be desired that only an economist would think it works. For Nobel prizes to be awarded for this indicates why economics is the dismal science(e.g. inaccurate & practically worthless). You saw what Scholes & Merton's theories did with Long Term Capital Management. Another worthless Nobel laureate for real world use is John "A Beautiful Mind" Nash and his game theory which one economist called as important a scientific development as the discovery of DNA. When confronted with situations where "Nash Equilibrium" falls completely apart, a Stern School Eco professor's only defense was, "it's a brilliant academic work."
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