the good investment strategy is to put 90% of your money in the safest possible government securities and the remaining 10% in a large number of high-risk ventures. This insulates you from bad black swans and exposes you to the possibility of good ones. Your smallest investment could go “convex” – explode – and make you rich. High-tech companies are the best. The downside risk is low if you get in at the start and the upside very high. Banks are the worst – all the risk is downside. Don’t be tempted to play the stock market – “If people knew the risks they’d never invest.”
My opinion would be that most of the people who go with Taleb's approach will have a negative return on their investments. Typically, you lose everything on your 10 % flyers, and you make less than 10 percent return on your safe investments. Ergo, you lose. Of course, a few people win. Their flyers turn out to include Google before it went public, or somesuch.
I just finished The Black Swan. Toward the end, Taleb goes on a long rant, in which "Gaussian" becomes an epithet, which he flings at finance Nobel laureates Markowitz, Sharpe, Scholes, and Merton.
I want to ask Taleb a simple question about the non-normality of stock price changes. Why?
Either the "news" that affects stock prices is not normally distributed, or prices react irrationally to news, or both. Taleb might want to argue that "news" is not normally distributed. But what is the mechanism for this? I understand the mechanisms that make book sales or academic reputation or wealth have highly non-normal distributions. Basically, a small advantage can cumulate over time. But "news," in the financial market sense of the term, does not cumulate over time. If you know something is going to cumulate over time, then it is not news!
Moreover, the classic example of October, 1987, does not appear to reflect news. It seems, to me anyway, to be more of a case of market prices going off independently of news.
The recent run-up in oil prices represents a similar puzzle. I think that it's difficult to tell a story for the rise in crude prices for the last six months that is based on the rational digestion of news. Either six months ago folks were overly optimistic about long-term supply and demand conditions or now they are overly pessimistic about those conditions. I don't think that what changed in the last six months was the news about supply and demand.
If the Black Swans come from the skewed distribution of returns, then investing in some highly uncertain projects makes sense (until enough people start to do it that the expected returns get driven way down). However, if the Black Swans come from bubbles developing and popping, then there is no great opportunity in trying to bet on Black Swans. So I think the question of why stock price changes are non-normal is a key question.
Overall, the book was a disappointment. As I feared, I agreed with much of it, and from what I agreed with I learned relatively little.