can better explain. 
How do you like it so far? I loved Fooled by Randomness.Warner wrote:I'm reading his new book - "The Black Swan: The Impact of the Highly Improbable"
[/i]
I always grin when people talk about "black swans" as improbable events.Warner wrote:I'm reading his new book - "The Black Swan: The Impact of the Highly Improbable"
And the "white" in Great White North isn't intended to describe the colour of our swansTravisMorien wrote:Swans in the Southern Hemisphere are black, and far from improbable they're very common in the rivers and lakes of Australia.
This fellow lives in a park a few miles to the west of me.
1. I know you and I are beginning to seem destined to not ever be on the same side of any issue, but please don't take this response as just mindlessly playing into that role. I am speaking from my carefully considered opinion.johndcraig wrote:I’d say it’s a long way from Diehard thinking
Diehard thinking says the past explains the future, but you don’t know when or how those past events might repeat themselves.
Code: Select all
Outcome
Good Bad
Good Deserved Success Bad Break
Process Used to
Make the Decision
Bad Dumb Luck Poetic Justice
Should Warren Buffet invest in a Target Retirement 2005 Fund? Bill Gates?Gordon wrote:When you have enough marketable securities it is time to keep your equity allocation in the 20% to 30% range. The added wealth you could have earned with a more aggressive portfolio is not sufficient to make up for a visit from the black swan.
Swans in the Southern Hemisphere are black, and far from improbable they're very common in the rivers and lakes of Australia.
This is a great recap article of Taleb's approach.Warner wrote:Taleb has a web site, but a good place to start is Malcolm Gladwell's 2002 New Yorker profile, "Blowing Up" - http://www.gladwell.com/2002/2002_04_29_a_blowingup.htm
The metaphor of the Black Swan is historically
attributed to the difficulty in inductive logic called
Hume’s Problem of Induction...and of the complications that
lie in deriving general rules from observed facts –and
from those facts only. How many white swans does one
need to observe before inferring that all swans are
white and that there are no black swans? Hundreds?
Thousands? The problem is that we do not know where
to start –we lack a framework of analysis to know if our
ex ante estimation is appropriate, which is key in any
form of inductive inference. Note that the Black Swan is
not just a metaphor: until the discovery of Australia
common belief held that all swans were white; such
belief was shattered with the sighting of the first
cygnus atratus.
Needless to say, I was generalizing, but I think it is a valid generalization. Note that I said “you don’t know when or how those past events might repeat themselves”. The great majority on this forum look to the past to determine how much they expect equities to outperform fixed and what period of time is needed to virtually assure outperformance. Maximum expected market downside is almost always by reference to historical downturns. TrevH has become very popular with his historical analyses of asset class performance. Etc.Diehard thinking says the past explains the future, but you don’t know when or how those past events might repeat themselves
TimDex wrote:His own investments are a combination of 80-90% short term treasury bills and the remainder put into a wide variety of long-shot "random" bets. I assume private equity, options, derivatives, venture equity and the like.
Any of that seems awfully complicated for an individual investor. It's so much easier to be fairly passive after choosing a number of index funds. Is that what they call confirmation bias?Murray Boyd wrote:Taleb doesn't exactly give asset allocation advice, but he mentions something about how a person could be mostly in bills and the rest in fat-tails type business. He specifically mentions venture capital, biotech, and book publishing. They have to be things with the opportunity of colossal payoff -- the next Google or Microsoft -- and not things with an upper limit, like a gas station.
My understanding of confirmation bias is that you tend to read and accept ideas that agree with your own thinking while rejecting ideas that are contrary to your thoughts.Teetlebaum wrote:Any of that seems awfully complicated for an individual investor. It's so much easier to be fairly passive after choosing a number of index funds. Is that what they call confirmation bias?
Someone once said that US stock returns have been the result of luck. Not sure if it was good luck or Bad Luck. I guess what you're saying, John, is that investors should be prepared for the worst. Something like Japan in the 1990's or the UK in the 1970's. Or even worse.johndcraig wrote:Truly unexpected results that are far different and perhaps much worse than anything that has happened in the past are a real possibility.
...
Passive investing is fine, but each should take heed when Mandelbrot says that most people’s thinking is locked into normal curve thinking and as a result they underestimate the actual risk that exists from the fat left tails.
In response to comments like mine many people call for a mathematical equation that will tell them precisely how to adjust one’s AA for these contingencies. Failing that, most ignore the warning. IMO it is wrong to ignore Taleb's and Mandelbrot's warnings and each should consider the possibility of making some adjustment to account for the real possibility of black swans; no precise formulas exist.
I’m not sure exactly what you are getting at, but you seem to be saying that without a specific plan, there is no plan at all. If that is what you are saying, then I disagree.But, of course, in order for us to even have a conversation about what we might do about these problems when making our investment decisions, we have to consider proposals with at least some minimal amount of specificity. Otherwise, we are not really discussing anything practical at all.
I don't want to repeat our prior debates on this subject. I'll just note that what you have said so far is fine in theory, but I also have no idea what you are actually proposing one should do in practice. You always object at this point that I want a mathematical formula or a "perfect" plan, but that is false. I would just want something more than "be more conservative" or "use your best judgment", because that is advice without content. But I understand that you either will not or cannot be more specific, so that is as far as our conversation can go.johndcraig wrote:To me a nonspecific plan is better than no plan at all. If one agrees that he/she has not been considering black swans, then that person should factor some increased level of conservatism into all of those factors that go into setting her AAs. For example, if she considers need-ability-willingness in the context of her financial situation and age, and that has been done without considering black swans, then the AA should be reconsidered by adding the black swans. No mathematical formula exists; it is about using one’s best judgment. It is far from perfect, but doing something here is better than doing nothing.
You seem to be criticising me for not being able to quantify the black swans better than Taleb or Mandelbrot can. Is your conclusion that if they can't be better quantified then they don't exist? So what is your advice to someone who now believes that black swans create additional risk, but previously did not consider them in her allocations? Is your advice to do nothing? If so why?BrianTH wrote:I would just want something more than "be more conservative" or "use your best judgment", because that is advice without content. But I understand that you either will not or cannot be more specific, so that is as far as our conversation can go.
I have seen no evidence of this. I do not think I have ever seen someone suggest that it is impossible for the future to be different from the past. Can you provide some quote's that support your assertion?Despite the fact that everyone is willing to give lip service to bad events happening, IMO few take to heart what Taleb and Mandelbrot are saying. Truly unexpected results that are far different and perhaps much worse than anything that has happened in the past are a real possibility
Again, I see no evidence of this claim. Of course there is no precise mathematical equation to figure this out. Can you show an example of someone calling for one?In response to comments like mine many people call for a mathematical equation that will tell them precisely how to adjust one’s AA for these contingencies.
Of course that is not what I am doing. And I see no reason why you would even think that was a plausible interpretation of what I was saying. As always, John, I think you should stick to speaking for yourself--when you start trying to characterize what others believe, I think you get into trouble.johndcraig wrote: You seem to be criticising me for not being able to quantify the black swans better than Taleb or Mandelbrot can.
Again, of course not, and I would suggest the same thing: you are better off sticking to speaking for yourself and not trying to characterize others.Is your conclusion that if they can't be better quantified then they don't exist?
Well, we have discussed many possible implications of the fat tails problem and some of its variations. One of the simplest implications is that I think these observations give people a reason to shift more of their fixed income to shorter terms, perhaps all the way to cash or cash-like assets (which for me is a broad category including TBills, stable value funds, the TSP G Fund, TIPS, and perhaps gold). They can then restore their desired expected volatility-adjusted returns by slightly increasing their equity percentages. I think the net effect of this shift to shorter term/cash-like assets helps address some notable aspects of the fat tails problem.So what is your advice to someone who now believes that black swans create additional risk, but previously did not consider them in her allocations? Is your advice to do nothing? If so why?
I basically agree with this statement. If you take the general Vanguard risk test and it says 60/40 then you should probably scale this back based on your gut feel about bad things. By definition this bad thing would be significantly worse than October, 1987, the tech bubble bursting or 9/11, since these ultimately did not lead to any kind of catastrophic failure.johndcraig wrote:For me, the takeaway from this is not to attempt to match Taleb’s investments. Passive investing is fine, but each should take heed when Mandelbrot says that most people’s thinking is locked into normal curve thinking and as a result they underestimate the actual risk that exists from the fat left tails. John
BrianTH wrote: Well, we have discussed many possible implications of the fat tails problem and some of its variations. One of the simplest implications is that I think these observations give people a reason to shift more of their fixed income to shorter terms, perhaps all the way to cash or cash-like assets (which for me is a broad category including TBills, stable value funds, the TSP G Fund, TIPS, and perhaps gold).
BrianTH wrote: Another possible suggestion is to look at adding CCFs to the portfolio. In at least some fat tails scenarios, they can prove pretty useful in moderating losses, and plausibly they are likely to also have neutral or beneficial effects on the portfolio outside of fat tails scenarios.
Yes, yes, and yes! Taleb's approach can coexist peacefully and even integrate with the diehard philosophy.BrianTH wrote: Among other things, I think one implication of this philosophy is that one should not overcommit to using just financial assets (eg, stocks and bonds), but rather one should also include a healthy dose of real assets or their derivatives (eg, real estate or REITs, commodities or CCFS, and so on). I think it also makes ample sense to avoid overloading on country-specific risk, which is a particular concern for US investors.
