By Scott Ronalds
I had lunch last week at the Fairmont with Nassim Taleb, prominent financial author and professor at the Polytechnic Institute of New York University (there were a few hundred other people there too; it was an event put on by the Vancouver CFA Society).
Taleb’s work focuses on problems of randomness and uncertainty. He believes that investment risk cannot be measured, and the industry wastes a lot of time and energy trying to do so through sophisticated modeling and computer programs (which failed miserably during the financial crisis of 2008/09). In his New York Times best-seller The Black Swan, he suggests that investors should not be concerned about trying to predict rare and improbable events (Black Swans). Rather, the focus should be on developing strategies or systems to protect against such occurrences.
I found the presentation, titled Antifragile: Things That Gain From Disorder, disappointing. It started late and was cut short, had plenty of technical glitches, and jumped back and forth between slides. I also found Taleb’s advice relating to the topic and portfolio construction quite vague. Lastly, the main dish was salmon (not a fan).
Nonetheless, I took away a great history lesson. Taleb is a big proponent of co-investment or having ‘skin in the game’. He referred to it as “the best risk management tool ever” and suggested that if you invest with someone, you want them to be hurt as much as you if the investment fails. He related the concept to Hammurabi’s Code, an ancient Babylonian law that called for an “eye for an eye” punishment if the law was broken. Taleb cited an example whereby if a house collapsed and killed the owner, the architect would be sentenced to death, as he could be the only one who truly knew of any weaknesses (risks) in the structure.
While harsh (and unjust) in many respects, the Code makes good sense in investing. Although I’m glad I don’t live in ancient Babylonia.