Lessons from Nassim Taleb applied to stock investment

Lessons from Nassim Taleb applied to stock investing

Nassim Taleb has become one of the most popular thinkers of today on his own merits. His publications are a reference when it comes to understanding our environment and interpreting present and past reality in order to make predictions about the future. It is not surprising, therefore, that he has become one of the leading authors in the world of stock investment.

In this article, Adrián Godás, collaborator at the Investment Academy, will teach us how to apply some of the most important lessons of Nassim Taleb to investing in the stock market in general and value investing in particular.

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  • Francisco García Paramés and other value. It defends that: the longer it has existed, the longer it will live. This obviously does not apply to perishable organisms such as animals, but to technologies, books, music ...

    It was in 1964 when a certain Lindy wrote an article in an American magazine stating that the future expectations of a television comedian could be related to the length of time he had been on television. From this experience, the brilliant mathematician diversify our portfolio in a wide number of securities, and to each give them a similar proportion in the portfolio. He assures that, in case of concentrating too much, with one of the investments going wrong, we can already take the profitability that year by stoning.

    Nassim Taleb diversification example with Bill AckmanWhen talking about concentration I can't help but remember Bill Ackman, which has had a pretty bad season with failed hits like Valeant and Herbalife (I recommend you grab some popcorn and watch the documentary “to what extent to diversify. I personally always have around 10 securities in my portfolio, which seems to me to be a correct figure, because let's remember that and the "dean" Benjamin Graham recommended about 15.

    Kelly's F, plus math-based lessons from Nassim Taleb

    Related to the above. This formula developed by the mathematician the bubble in bonds that little must be missing to play.

    Mergers don't work. That's how clear he drops it. Taleb argues that much-talked about mergers to improve efficiency and create economies of scale are often stupid things invented by managers to make the company bigger and charge more.

    Finally, a personal reflection. Our favorite thinker tells us that we have to become robust and if we can, anti-fragile. But ... how to make a company robust? That is, do not be affected by stressors such as competition, economic crises ... and even benefit from them.

    TAfter thinking about it for a while, which Archimedes, we exclaim: EUREKA!Eureka of Archimedes

    The competitive advantages. That is what makes a robust company. Let's see some examples to understand it:

    A copper miner with a cost advantage will be able to resist a Black Swan that plunges the price of that metal in half. That advantage will allow you to survive while your competitors are closing.

    A company that has the advantage of the network effect Like Tripadvisor or Facebook, you can rest assured that your competitors will not do you much harm as it will be difficult for them to reach your size.

    The destroyer of empires, the debt

    I could have included this idea in the previous section, but Taleb emphasizes it so much that I think it deserves its own. For him, it is the most fragile element that can affect a company or State.

    Nassim Taleb's Lesson on Debt in Stock Investing“Debt increases risk. Whether it is personal, corporate or government debt, any increase in debt increases the risk of economic catastrophe. "

    And this is what he thinks of governments and central banks:

    "They are transforming the tumor into a metastasis"

    He does not fool around with criticizing the behavior of governments, since he affirms that "The debt problem cannot be cured with more debt". In fact, the most definite economic recommendation he gives is that the deficit must be ended.

    As for companies, it is one of my investing principles: not to buy over-indebted companies. I try to look for companies with net cash, and in case of having debt at most, that have 50% liabilities 50% net worth. The only exceptions where I can tolerate more debt are in commodity companies that need a lot of capital such as mining or gas companies, and even then I look for the ones with the least debt in the sector.

    The overrated of formal education

    This is no longer a lesson only for investment, but for life in general. The good Nassim shows us how the countries with the most university students are not precisely the richest, and that those that tend more towards practical education or what he calls "Teacher-apprentice relationship" like Switzerland they are.

    His main criticism is directed at the universities, which he calls useless. I am going to summarize for you in one sentence what he thinks:

    "The academy is to knowledge what prostitution is to love"

    The only thing I want to add is that you will never learn the Stock Market in a University, MBA or Master. If not based on reading the right books, operate in real and learn from mistakes. The closest thing may be some courses, but we already know how full of charlatans the Internet is. Regarding courses, the free introductory course on investing in the stock market of a certain Paco Lodeiro it's like an oasis in the desert;)

    Put asymmetries in your wallet

    Another of Nassim Taleb's main ideas is to look for asymmetries. Fragile organisms have little to gain and much to lose, anti-fragile is the other way around.

    Investing is about locating situations where if we win, we win a lot and if we lose, we lose little. When I read that excerpt, I couldn't help but remember one of the most fundamental concepts of value investing: the safety margin.

    Margin of safety in value investing

    Remember that the margin of safety is the difference between price and intrinsic value. The greater the difference, the more security we have. It is a clear case of asymmetry: much to gain, little to lose.

    If in the end it turns out that Taleb is a value investor and he doesn't know it.

    More lessons from Nassim Taleb applicable to stock investing and value investing?

    I think this is a decent approximation to Taleb's work and his lessons. Hopefully with this small contribution he will be able to spread his ideas a little more, because it seems to me a serious mistake that there is so little material in Spanish on the net. I cannot finish without recommending his books, loaded with wisdom, which break our beloved ideas to each page.

    Finally, I encourage you to share more ideas and concepts from Nassim Taleb applicable to stock investing and value investing in the comments. I'm sure you can contribute interesting ideas.

    Be robust.