Global Wandering

For the last week I’ve been absorbed in an exhilarating, but frightening book, "The Black Swan” by Nassim Nicholas Taleb. The book eloquently and systematically makes the case for why my chosen profession is based on a “great intellectual fraud.”

The fraud he writes of is the “bell curve”, and as it applies to modern finance the leap of faith we take that expected returns for asset classes can be neatly plotted around an average with a precise measure of variability (risk) denoted by the standard deviation. All the while we ignore the fat tails, or Black Swans as he calls them⎯unpredictable, rare and extreme events that not only skew the average but make the concept of average meaningless because the Black Swans change the game entirely. After the fact, we create narratives to explain why the extreme event took place so that we can watch out and protect ourselves from such unpleasantness in the future.

Unfortunately, the next Black Swan is usually something that wasn’t even on the radar. We don’t know what we don’t know.

Much of what Taleb writes I’ve learned the hard way over the past decade. I used to think certain investment managers and corporate leaders were smarter than everyone else, only to find that they too had no clue and were buffeted by the unexpected.

Now I manage money by refusing to put faith in experts, keeping costs low, maintaining extreme diversification in order to avoid company level Black Swans, and staying humble. It's called winning by not losing.

Yet what I find disturbing about the book is not just its ramification for investing, but the role “Black Swans” have played in my life to date and the significant impact they will have on my future. So often we look back and create a narrative for our lives. We selectively remember things while conveniently forgetting others. We attribute too much of our success to our own skill and not enough to the kindness of others or just to plain luck.

In my case, I have too much vested in my Plan A ⎯ my systematic vision of an early retirement in ten years in order to spend more time traveling and doing good. I need to focus more on Plan B and Plan C ⎯ the plans that recognize the existence of Black Swans and that the steady trajectory I have forecast for Plan A will not likely be as smooth and upward trending as I anticipate. In fact, Taleb would recommend throwing out plans entirely, since we have no ability to predict the future.

At this point, I have no conclusions. I plan to reread the book while in France next week.