Nicholas Taleb is famous for his black swan concept, and also for making a lot of money when everyone else is losing it.
A recent GQ article quoted Nassim Nicholas Taleb as saying that in the falling market he “made $20 billion for our clients, half a billion for the Black Swan fund.” 1
I checked with Nassim Taleb regarding the $20 billion in gains and asked if he were misquoted. He responded via email: “The quote is inaccurate. THe [sic] 20 billion might correspond to the face value of positions.” This response is both vague and different in character from the mythical $20 billion in gains inaccurately quoted in GQ‘s article. The total gains could be a tiny fraction of what Taleb loosely describes as “face value.” 2….The black swan fund’s strategy is purportedly to buy outâ€ofâ€theâ€money put options on stocks and broad market indices and hedge tail risk for clients. The strategy may produce long periods of mediocre-or even negative-returns followed by a large gain and vice versa. No one can tell you for certain exactly when (or for how long) large gains are possible. Initial success in a newly created fund may not be replicated in the future, and there is always the problem of scaling. Scaling refers to the fact that an individual fund may make a high return on an initial investment, say 100% on $100 million, but lose 10% on $1 billion.
I first read “Fooled by Randomness” by Taleb, about a couple of years ago and wrote a post about probability v expectations and gaining from big crashes in the markets.
The idea is that you position yourself to gain from the spectacular crashes that are bound to occur once in a while, and so buy “cheap” put options in that anticipation (like the black swan fund strategy).
Here is what I thought at that time and is still valid:
I have heard my dad telling me once that these market crashes are inevitable and every month one should buy a ‘cheap’ PUT so that when once in a year the market falls spectacularly that PUT is worth a gold mine and covers up for all the remaining 11 months when the market followed its due course. He was talking about low probability and high expectation and I think a lot of investors do think about this but not really do anything about it.
I myself have never tried buying PUTs hoping that the market crashes and certainly do not recommend it to anyone but it is certainly a thought that is worth a thought. And while one is at it why not buy a ‘cheap’ Call as well just to take care of the ridiculous 1000 points upward moves too!
I never did carry this thing out and I am glad I didn’t do anything like that because although I did anticipate that there will be long periods of no gains, from the performance of Taleb’s fund, it looks like even when the black swan appears – you are not guaranteed to make a killing.
Photo Credit: Ennor