How can I be Anti Fragile? 11/25/12

Nassim Taleb’s new book “Antifragile: Things that gain from disorder” is likely to be another hit as he uses a catchy title, excellent reputation and his academic standing to promote his extreme but correct theories. I have to admit I was one of the readers of the “The Black Swan” and wondered how I could make money from a market crash. Options came to mind certainly. But I felt I would have to take a thousand cuts of the sword before the black swan event unfolded, whenever it did. I am not too good at taking a thousand cuts. After a few cuts, I am out of there. I think I am still fragile; but I do have plans for risk management of my portfolio. the few people who did massive bets against the sub-prime also had to take a thousand cuts as the markets kept climbing against their positions and they were paying out money against their credit default swap positions. The investors in those pools riled against their money managers and one famous investor and his company sued their momeny manager but the money manager held firm, held the money and remained antifragile and came out with a huge win.

The notion that we are fragile, robust or antifragile is interesting to me. Someone who can handle volatility and actually gain strength from it is antifragile. Taleb talks about his drinking a drop of local water in India to make him stronger. David Cameron supposedly considers Taleb his “Guru”.

I remember thinking about the housing markets in its prime and wondering how I can shelter myself from a possible market drop. The idea of buying put options against a major ETF like IYR or against the housing stocks like HOV occurred to me. But no one else was talking about it and soon my own ideas withered away. I would have bought put options worth my mortgage when the housing market was indicating a fall. Would that have worked? Yes. But I did not act on it.

So what is the next Black Swan event and how do I make myself antifragile? I like to use put options as a hedge and it feels like a thousand cuts when the market climbs like it did last week. But does that make me more robust? Yes. But antifragile? Hmmmm not sure that I have reached that far. Governments and States are extremely fragile and it will take a huge change in the Government to think of them getting antifragile. Taleb talks about allowing institutions to fail so that there is learning memory from the events. But Paulson, Bush, Bernanke and Obama all backed away after Lehman Bros and Bear Stearns… and other like AIG, Bank of America and Merrill Lynch who made very bad bets survived in one form or another. And what about Goldman – well they pulled off the two sided bets that kept them antifragile I suppose.

The next black swan event we will see will be Governments unwilling to take a tough course and instead continuing to print money. I need to map out a plan that Taleb refers to as being more heuristic in nature and not too complicated. The damage in those fat tails can be a lot more than investors like me can withstand.  I will always want to protect myself against them fat tails. But what can I do to truly make lots of money from those events without facing a thousand cuts? I think I have to learn to take those cuts in order to be stronger.
How about protecting my portfolio with alternate currency and gold trading positions? Yes – I need to take some time out during Christmas and finalize those plans and put them into action by 2013 January…I also need to learn to be more contrarian and keep positions in those tails, regardless of the direction.