Blowing Up - by MALCOLM GLADWELL (Taleb vs Niederhoffer)

[HitandRun]

I also agree with Taleb, in theory... It appears that he has not been able to execute his own pet theory well enough to be a big time money manager. But I must admit that I learnt quite a few things from reading his book, fooled by randomness.

On the other hand, the Niederhoffer that I read in this thread appears to be just a high rolling baccarat player, nothing more. If you have spent enough time, like me , at the baccarat tables, you will know what I mean.

[specuvestor]

Exactly. Newsworthy, but can't make you enough money.

For the record, Victor Niederhoffer is still doing more than ok.
http://en.wikipedia.org/wiki/Victor_Niederhoffer

Nonetheless I love Malcolm Gladwell books and this Taleb v Niederhoffer read was interesting but you have to take alot of insights with a pinch of salt.

I disagree about the profitability bit. The greatest trade in recent financial history (John Paulson's subprime trade) follows the same negative carry, high payoff characteristics as Taleb's options buying strategies.

The difficult part of these strategies is in the timing. People tend not to like investments structured as small periodic payments for large potential payoffs and it can be quite difficult to stay the course.

That said, Taleb is mainly warning against bearing "blow up" risks, where the possible losses are much larger than an investor thought was feasible. Having worked at a corporate treasury where fx options writing and use of structured products were common day to day activities, I have a deep appreciation for the Taleb's line of thinking.

守株待兔 is highly profitable but it cannot be an ongoing business strategy. The big news is always these trades that u mention, as well as big blow ups. But if you are looking for a long term strategy, it is the bit by bit accumulations that will add up. I respect managers from Tudor to Bill Miller because of their consistent track rather than one hit wonder.

Black Swans reminds us of hedging tail risks because unexpected events can happen, and I deeply appreciate that as well. But hedging is not a business.

Value stocks OTOH is not a 5 sigma event.

I view it differently. I view Taleb as offering a structured product with negative carry and high but low probability payoffs. It is not intended to constitute the entirety or even a large portion of an investment portfolio. As long as the product does what it says on the box, I think the strategy is successful in achieving what it aims to provide for investors. Whether there is demand for such a product is another matter as I previously said, such structures are unpopular.

Niederhoffer's type of business model is equally unsustainable. If one black swan can leave one entirely bankrupt, I don't think it is suitable for very long term investing. For value investing, I think margin of safety, diversification and strict stop losses (if significant leverage is used) should be sufficient to prevent blow ups.

Buying deep out of money option is actually akin to buying SuperCat insurance. Very low probability high payoff.

I don't think Niederhoffer is a good example but let's just compare with him who probably will have 9 good years and one bad year... not dissimilar to Meriwether. The mirror image would be black swan strategy of nine bad years and one good. Risk/reward is clear. This is not exactly the one-foot bar that we talked often in this forum. BTW I am not supporting Niederhoffer type of model, I'm just saying the risk/reward even with a bad model is clear.

As a hedge with small allocation to the portfolio (which you rightly pointed out) and a stark reminder to our positive bias paradigm, black swan serves a good purpose. But it is not a business.