The Research HUB: Black Swan Principles

How to operate under uncertainty

A long time ago before I was even involved in financial markets I was sitting in a coffee shop reading a book on chaos theory. Just some regular light reading when you get bored :)

So I am sitting there and a random guy comes up to me, sees what I am reading, and says, you should read The Black Swan by Taleb. He then proceeded to write it down on a spare piece of paper he pulled out of nowhere and handed it to me.

Now you have to realize, this guy had a crazy professor look and I don’t typically take book recommendations from random people. In general, the book recommendations random people provide aren’t great because it is more about something that impacted them as opposed to suggesting a book that would specifically help me.

For some reason though, I decided to add another book to my reading list even though at the time I was working full time and spending 12-15 hours a day memorizing textbooks to test out of stupid college classes.

I will say that it dramatically changed the way I thought about the world!

Now to be fair, I never even watched an interview with Taleb or looked at his Twitter till a year or so ago. I was kind of surprised at how abrasive and belittling he was to people. But I don’t like letting people’s personalities affect how I think about fundamental concepts. I still find the ideas in his work incredibly helpful.

There are 3 things that stood out the most for me:

• We tend to focus on what is seen and make generalizations or implications from it.

• History hides a lot from us because it is only one outcome of many possible scenarios.

• An event and your exposure to it are two fundamentally different things. Managing your exposure is more important than predicting.

A lot of the ideas in Taleb’s work have to do with HOW to think as opposed to specific investment implications. For example, one of the ideas is that you want maximum optionality. The more exposure to the multiple options, the higher the probability you will benefit under uncertainty.

The main thing you will begin to realize is that your decisions in life are a reflection of the quality of your thinking. The collocation of these decisions compounds and becomes a portfolio. An investment portfolio in liquid markets might have a lot of quantitive measures but at the end of the day, it is a reflection of your thinking.

This is part of the reason I focus on all aspects of the investment process in this Substack. Running trades is built on a constant refinement of your thinking in the background.

Keep improving your knowledge and maintaining maximum optionality! If you want more of a tangible expression of these topics in how they connect with risk management in a portfolio, check out this article:

The BLACK SWAN!