Nassim Nicholas Taleb wrote The Black Swan to explain rare events. A Black Swan is unpredictable, has a huge impact and looks explainable afterwards. Google’s rise and 9/11 are his examples. The book is not only about money. Still, it holds powerful lessons for anyone who saves or invests. Here are five.
Are you a turkey?
Taleb tells the story of a turkey. Every day, the turkey is fed. Each feeding makes it feel safer. Its confidence is highest just before Thanksgiving. Then the shock comes.
Taleb says that past comfort can hide future danger. Do not assume your investments are safe simply because they rose over the years.
Be careful with risk numbers
Most risk measures use the bell curve. Taleb calls it a great intellectual fraud. It assumes that extreme events are almost impossible. But markets do not behave like that.
He notes that 10 days in 50 years accounted for half of the market’s returns. Long-Term Capital Management trusted such models. It went bust in 1998. Do not trust one number called risk.
Taleb separates two worlds. In Mediocristan, no single case changes the total. Height and weight belong here. In Extremistan, one case can dominate everything. Wealth, book sales and market moves belong here. Treat money matters as Extremistan.
Boring and steady can be dangerous
Nassim Nicholas Taleb warns about businesses that earn small profits steadily. They hide rare, huge losses. In 1982, large American banks lost almost everything they had ever earned.
Yet, they called themselves conservative. Steady returns can be borrowed from destiny. Ask what could go wrong, not only what has gone right.
Use the barbell strategy
Taleb avoids medium-risk investments. He cannot trust how medium risk is measured. Instead, he suggests two extremes. Put 85-90% in extremely safe instruments like Treasury bills.
Put the remaining 10-15% in highly speculative bets. Make many small bets. Your loss is limited, but your gain can be huge. No Black Swan can hurt you beyond your floor.
Taleb also advises exposure to positive surprises. Venture capital and scientific research lose small but can win big. Seize real opportunities when they appear.
Doubt forecasts and success stories
Nassim Nicholas Taleb found that experts predict poorly. Philip Tetlock studied about 27,000 predictions. Experts’ errors were far larger than they expected. Forecasts also need an error rate. Taleb says not to cross a river that is, on average, four feet deep.
Success stories mislead, too. Millionaires share traits like risk-taking. But failures share the same traits. The failures are simply silent. Often the difference is plain luck.
Taleb also says more information can hurt. Bookmakers became more confident with extra data. Their accuracy did not improve. Read less noise and think more.
What Nassim Nicholas Taleb means: You cannot predict the next Black Swan. But you can prepare for it. Limit your downside and stay open to luck.
Stay humble about what you do not know. That humility may protect your savings best. In short, avoid being the turkey.
