Earlier in the year, the folks at Mawer Investment Management published a podcast on why they tend to focus on vulnerabilities and try not to predict triggers for events.
Investing based on "vulnerabilities" is a losing concept: agreed. The only such approach that I know of that has a good track record might be Taleb's, yet his is hardly replicable.
"We all tend to overestimate the likelihood of extremely unlikely events." -- Again re Taleb, that sentence sounds surprising. If I understand him correctly, he says there are a lot more fat tails around than people realize, that thousand-year-floods actually happen once a lifetime. And since catastrophic events do happen unexpectedly, it is necessary to design one's portfolio that such an event is not ruinous.
Yes, Taleb is correct that there are more fat tails than a normal distribution would assume and that is what he tries to exploit with his approach. But what I mean with my sentence is the finding in behavioural finance that subjective probabilities are different from objective probabilities. An event that has a low objective probability is overweighted in the mind of investors to a much higher subjective probability, while events with a high objective probability is underweighted to a lower likelihood.
What Taleb tries to exploit is the difference between rational investor models and the real world, what I am focusing on is the difference between how the world is and how we percieve it and act on it.
Endless waiting until you‘re right is now less painful for one type of trade: shorting stocks that don‘t pay a dividend has positive carry now that interest rates are significantly higher than zero. (Of course you still run the risk that the market pushes the price higher and a margin call is triggered).
Investing based on "vulnerabilities" is a losing concept: agreed. The only such approach that I know of that has a good track record might be Taleb's, yet his is hardly replicable.
"We all tend to overestimate the likelihood of extremely unlikely events." -- Again re Taleb, that sentence sounds surprising. If I understand him correctly, he says there are a lot more fat tails around than people realize, that thousand-year-floods actually happen once a lifetime. And since catastrophic events do happen unexpectedly, it is necessary to design one's portfolio that such an event is not ruinous.
Yes, Taleb is correct that there are more fat tails than a normal distribution would assume and that is what he tries to exploit with his approach. But what I mean with my sentence is the finding in behavioural finance that subjective probabilities are different from objective probabilities. An event that has a low objective probability is overweighted in the mind of investors to a much higher subjective probability, while events with a high objective probability is underweighted to a lower likelihood.
What Taleb tries to exploit is the difference between rational investor models and the real world, what I am focusing on is the difference between how the world is and how we percieve it and act on it.
ah! Much clearer to me now, thanks.
Great article. Being right but too early, can lead to the same result as being wrong.
Endless waiting until you‘re right is now less painful for one type of trade: shorting stocks that don‘t pay a dividend has positive carry now that interest rates are significantly higher than zero. (Of course you still run the risk that the market pushes the price higher and a margin call is triggered).