Nassim Nicholas Taleb is an experienced trader and the author of several books on risk, including Fooled by Randomness, The Black Swan, Antifragile, and Skin in the Game. His writings go against the grain of conventional wisdom and are worth a read for investors interested in thinking about how to balance risk and return.
There are a lot of lessons to be drawn from Taleb’s writings. In this article, we’ll take a look at seven important pieces of Nassim Nicholas Taleb investment advice for investors.
Nassim Nicholas Taleb’s Investment History
Nassim Nicholas Taleb began his career in 1984 as a derivatives trader on Wall Street. His major success came in 1987, when he was holding low-probability put options during Black Monday. In a single day, he made more than $35 million.
In 2003, Taleb predicted that the US mortgage lender Fannie Mae would collapse. He didn’t directly profit from the 2008 subprime mortgage crisis, but the event proved his forecast correct.
Taleb began writing about randomness and risk management in 2001, when he published Fooled by Randomness. He followed up with The Black Swan: The Impact of the Highly Improbable in 2007. Later books include Antifragile (2012) and Skin in the Game (2018).
Today, Taleb has a net worth estimated between $85 and $100 million.
Nassim Nicholas Taleb’s Investment Advice
Taleb’s books are mainly focused on risk, critical thinking, and protecting against low-probability events. He offers a unique way of thinking that investors can benefit from applying. Here are seven of the best pieces of investment advice from Nassim Nicholas Taleb.
1. Be Prepared for Black Swan Events
Taleb’s first book, The Black Swan, is all about black swan events – low-probability events that are difficult to predict because they fall outside our realm of experience. For many investors, the COVID-19 pandemic and the ensuing market turmoil is a tangible example of a black swan event and the impact it can have on portfolios.
The nature of black swan events makes them incredibly difficult to prepare for. After all, you don’t know what’s coming. There’s no one-size-fits-all solution, but Taleb advocates for diversifying your assets and focusing much more heavily on conservative asset classes like bonds than on stocks.
2. Be Wary of Financial Experts
Perhaps the most well-known line from Nassim Nicholas Taleb’s The Black Swan is his assertion that “the problem with experts is that they do not know what they do not know.”
This doesn’t mean that everyday investors shouldn’t trust financial experts. Rather, it suggests that even experts have blind spots, and those who look to financial experts for guidance need to keep this in mind. Taleb argues that conventional investing wisdom isn’t necessarily the best possible wisdom, in part because investing experts don’t know what the future might hold.
3. Have a Rainy Day Fund
Taleb repeats a mantra that “survival comes first.” Applied to investing, this echoes the sentiment of Warren Buffett that “in order to succeed you must first survive.”
Buffett meant that no matter what happens in the market, your portfolio needs to be able to get through it. But Taleb applies this axiom more broadly, pointing out that events in life can also affect your ability to invest. For example, if you break your leg and have to pay hefty medical bills, that can force you to take money out of your portfolio if you’re not prepared.
The solution is to keep a rainy day fund on hand. Taleb himself doesn’t advise how big this fund should be, but most personal financial experts recommend it cover at least six months’ worth of expenses.
4. You Need to Have Skin in the Game
Taleb’s latest book, Skin in the Game, is all about the importance of giving people a share in the outcome of their efforts. As Taleb explains it, “he or she who wants a share of the benefits needs to also share some of the risks.”
The feeling of having “skin in the game” is familiar to most investors – after all, your money is on the line with every decision. Importantly, investors need to maintain this feeling when they’re developing strategies and practicing with paper trading accounts. If you don’t feel like your money is on the line during practice, you’ll make very different decisions from when you’re trading for real.
5. Risk Adds Up
Another interesting point Taleb makes in Skin in the Game is that risk adds up over time, and that matters if the consequence is catastrophic. Taleb uses life expectancy as an example: “If you climb mountains and ride a motorcycle and hang around the mob…your life expectancy is considerably reduced although not a single action will have a meaningful effect.”
It’s important for investors to keep this in mind, and one of the reasons that Taleb is a firm believer in never risking money you can’t afford to lose. Every investment is a risk, and sooner or later you’ll face the consequences of at least one risk-taking investment. When that happens, it’s important that you can handle the consequences rather than face financial ruin.
6. Small Risks Can be Beneficial
Although a lot of Taleb’s writing seems to suggest that investors never take risks, that’s not his takeaway. In fact, Taleb suggests that small risks can actually be good. However, it’s important to distinguish between small risks and large risks: “Jumping from a bench would be good for you and your bones,” he says, “while falling from the twenty-second floor will never be so. Small injuries will be beneficial, never larger ones.”
For investors, the lesson is simple. It’s okay to take risks as long as the amount of money you’re risking is strictly limited.
7. Take a Barbell Approach to Investing
Based on his ideas about risk management, Taleb suggests that investors take a barbell approach to investing. This means putting 85-90% of your assets in very conservative investments like treasury bills, AAA-rated bonds, and cash. Then put the remainder of your portfolio in highly speculative investments like options, venture capital investments, or individual growth stocks.
Taleb’s goal with the barbell strategy is to avoid “medium-risk” investments. According to Taleb, these investments actually leave investors highly exposed to risk. They could be wiped out in the event of a black swan event, and having only 10% of your portfolio in ultraconservative assets when that happens won’t help much.
Conclusion: Nassim Nicholas Taleb Investment Advice
Nassim Nicholas Taleb has some unusual views on investing and risk management. He suggests that investors need to prepare for the worst and do everything they can to avoid facing ruin during unexpected, calamitous financial events.
However, Taleb does believe in taking some calculated risks. He suggests that investors allocate a small portion of their portfolios to high-risk, high-reward investments.