The Black Swan by Nassim Taleb was a best-selling finance book written in 2007.
Here is my list of the important lessons from that book.
A Black Swan is an unexpected AND highly impactful event. The main focus is on negative events but there can also be positive Black Swans.
Nassim Taleb argues that the probability as well as the magnitude of Black Swans is greatly underestimated because people use past data and assume that the the standard statistical “normal curve” represents the probability distribution. He argues that in certain fields including notably in investing, large Black Swans are more likely than is generally assumed. He mentions numerous times the dangers of being misled by assuming that the probability of events are represented by the normal curve. He argues that while that is the case for things like the distribution of human heights. it is not the case form certain other things including investment market valuations.
He argues that it’s not right to even use the word measure regarding risks. That word implies a precision that is simply not possible.
Taleb argues that the focus should not be on trying to predict the timing or magnitude of financial or other Black Swans. Rather the focus should be on avoiding them or or insuring against against them and their impacts. (For example, avoid living on a flood plain or near any volcano. Wear your seat belt in every vehicle you are in. Have fire insurance on your home.)
In terms of positive Black swans, the strategy should be to make a number of very small bets on things that could have a tremendously large payoffs. I don’t think that this means that you buy lottery tickets (which are a bad bet by definition) but rather that you might find a few such investments where the “tickets” are under priced given the potential payoffs.
For investors, and particularly older investors or anyone with a portfolio that is multiples of their annual income, investing 100% in equities may be too risky given the impact of a huge decline which is always possible.
Human progress through the ages has often come in unexpected leaps rather than smooth progress.
The role of luck is under-estimated in great success stories.
We should focus more on the range of possible outcomes and the worse case, not just the average point estimate.
Taleb suggests the following “barbell” strategy to investing: 85% in super safe investments and 15% in numerous highly risky investments that could pay off big. This is very different from conventional asset allocation advice.
Think about the IMPACT of Black Swans not their probability.
In investing, very long options can be under-price and can have huge payoffs.
To avoid financial ruin, avoid debt.
He argues that companies that are “too big to (allow) to fail” should not be allowed to exist.
On Climate change, humans should be hyper conservative since we just don’t know the potential damage we may be causing. (Better safe than sorry).
Humans need variability and occasional extreme stress to per for best. Taleb believes that is is why High Intensity Training makes sense and works.
The long run results may not be that relevant since you first have to live through the interim.
I notes some seemingly accurate predictions Taleb made in his 2010 second edition:
Epidemics will be more acute
Globalization continues to create ever larger companies and this adds to risk
Culture is more and more dominated by fewer artists etc. (I would say Taylor Swift is a prime example).
There will be more acute runs on banks. (Silicon Valley Bank)
Summary by:
Shawn Allen
InvestorsFriend Inc.
January 2024