The only way to be successful in the markets

Successful businesswomanSome might have longer holding periods they like to stick to. Some might prefer switching positions on a much more frequent basis. It all comes down to the same. Getting exposure to opportunities. Here’s a quote from Nassim Nicholas Taleb’s book ‘The Black Swan’ describing that phenomenon. Quote from page 170:

“… seemed to follow implicitly, though not explicitly, Louis Pasteur’s adage about creating luck by sheer exposure. ‘Luck favors the prepared,’ Pasteur said, and, like all great discoverers, he knew something about accidental discoveries. The best way to get maximal exposure is to keep researching. Collect opportunities…”

So whenever a trade doesn’t work keep in mind the outcome of one single trade doesn’t really matter. What it all comes down to is to repeat the process over and over again. In the long run doing research on a regular basis and getting exposure to opportunities is the only way to be successful in the markets.

How did we end up with two, different definitions of risk?

When I say “risk” and you say “risk,” chances are high we don’t mean the same thing.

The finance industry defines risk as something measurable. It is variability within a set of known limits. You may have heard it referred to as standard deviation or even volatility. Ultimately, it represents how much an investment wiggles over time.

I’m an adviser who talks to humans. I also happen to be human. From my experience, I know humans outside the financial world define risk differently. In everyday life, we tend to think of risk as uncertainty, or what is left over after we have thought of everything else.

With uncertainty comes variability within a set of unknown limits. It’s the stuff that comes out of left field, like Nassim Nicholas Taleb’s black swan events. Because we can’t measure uncertainty with any sort of accuracy, we think of risk as something outside our control. We often connect it to things like running out of money in retirement or ending up in a car crash.

But how did we end up with two such completely different definitions of the same thing? My research points to an economist named Frank Knight and his book “Risk, Uncertainty and Profit.”


Taleb Says ‘Every Human’ Should Short U.S. Treasuries

TalebFeb. 4 (Bloomberg) — Nassim Nicholas Taleb, author of “The Black Swan,” said “every single human being” should bet U.S. Treasury bonds will decline, citing the policies of Federal Reserve Chairman Ben S. Bernanke and the Obama administration.

It’s “a no brainer” to sell short Treasuries, Taleb, a principal at Universa Investments LP in Santa Monica, California, said at a conference in Moscow today. “Every single human being should have that trade.”

Taleb said investors should bet on a rise in long-term U.S. Treasury yields, which move inversely to prices, as long as Bernanke and White House economic adviser Lawrence Summers are in office, without being more specific. Nouriel Roubini, the New York University professor who predicted the credit crisis, also said at the conference that the U.S. dollar will weaken against Asian and “commodity” currencies such as the Brazilian real over the next two or three years.

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Taleb reveals unsettling truths

How fragile we are. Five years on from the Lehman Brothers collapse, political and regulatory errors have made the world’s financial system even more fragile.

This alarming line of thought comes from Nassim Nicholas Taleb, best known for The Black Swan, which explained markets’ difficulties in pricing extreme events for which they had no precedent.

 Mr Taleb, who spoke to me in London last week, divides opinion. For some he is a genius, for others a charlatan. What seems clear, however, is that his gloriously charismatic act and polymath choice of imagery, drawn from philosophy, mathematics and the Classics, can get in the way of underlying ideas which are not in fact far-fetched. Indeed they contain a hard kernel of commonsense truth.

Here, then, is an attempt to render Mr Taleb’s poetic arguments in prose.  (more…)


Nassim Nicholas Taleb, the former trader and well known author of The Black Swan and Fooled By Randomness, has put together a new book of aphorisms, entitled The Bed of Procrustes.  The Procrustes of Greek mythology was a cruel fellow who stretched or shortened people to make them fit his inflexible bed. Mr. Taleb’s new book addresses the modern day ways in which “we humans, facing limits of knowledge, and things we do not observe, the unseen and the unknown, resolve the tension by squeezing life and the world into crisp commoditized ideas, reductive categories, specific vocabularies, and prepackaged narratives, which, on the occasion, has explosive consequences.”  In other words, we live under self-imposed delusions.  Here are a few of the aphorisms that expose our delusionary thinking, many of which can be applied to trading.  But, in order to understand their application, we must first step out of our delusional state.

The stock market, in brief: participants are calmly waiting in line to be slaughtered while thinking it is for a Broadway show.
You are rich if and only if money you refuse tastes better than money you accept.
The best test of whether someone is extremely stupid (or extremely wise) is whether financial and political news makes sense to him.
You can be certain that the head of a corporation has a lot to worry about when he announces publicly that “there is nothing to worry about.”
The main difference between government bailouts and smoking is that in some rare cases the statement “this is my last cigarette” holds true. (more…)

Anti-Fragile Trader

The Anti-Fragile Trader is someone that puts on very small position sizes in low probability trades, but shifts huge amounts of risk to the trader on the other side of the trade. The methodology of the anti-fragile trader is to bet on the eventual blowup of the traders making high risk trades for a small premium.

The favorite tool of the Anti-Fragile Trader is the out-of-the-money option contract. For pennies on the dollar, they can control huge amounts of assets. While they expire worthless the majority of the time, when a random Black Swan event hits the market affecting the option contract, they can return thousands of percent on capital at risk, and makeup for all the past losses.

The creator of the anti-fragile concept, Nassim Nicholas Taleb, traded long option strangles, betting on both directions to capture any huge trend event up or down. A company being purchased and rocketing up, or a disaster and a company stock sent crashing, was hugely profitable for Taleb. He also bought option contracts on futures markets. The key is very tiny bets on these trades versus total account equity. Tiny losses and tremendous wins was what made the system profitable. (more…)

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