In the post Meet Nassim Nicholas Taleb, I dropped in this quote without adding any comments.
the good investment strategy is to put 90% of your money in the safest possible government securities and the remaining 10% in a large number of high-risk ventures. This insulates you from bad black swans and exposes you to the possibility of good ones. Your smallest investment could go convex explode and make you rich.
Do I support this investment strategy? My short answer is it depends. Taleb has two variables isolated in this quote.
- Percentage of money allocated to the safest investment. (90%)
- Percentage of money allocated to high-risk ventures. (10%)
Let me add my own personal 3rd variable:
Are we in a secular bear or bull market?
Once you determine if the current investing environment resembles a secular bull or bear market, then you can adjust your definition of safest. If the conditions indicate a bull market is more likely then having 90% of your investment tied up in low yielding government debt seems foolish. If the market is range-bound or in a secular bear market then the goal is preservation of capital not appreciation of capital. As I explained in my post Mr. Financial Planner – Go Home and Get Your Shine Box! there is nothing wrong with near-cash investments in this market environment.
What makes Taleb interesting today is many investors now see the secular bull market from 1982-2000 is not coming back anytime soon. The mantra of Investing in Stocks For the Long Term is historically a fools move in a range-bound or secular bear market. But we still want the possibility of making a lot of money while preserving most of our capital. Hence the barbell strategy.
Taleb has spent the last twenty years on Wall Street so he has amble time to think about how to deploy his 10% on high risk ventures, while having the piece of mind knowing that 90% of portfolio is safe. Most investors will be ill-equipped to measure the risk versus reward to exploit those opportunities.
Learning how to spot under-valued investment opportunities that although risky provide a huge potential payout is something I’m interested in exploring. That statement is not an invitation to promote your business in the comments below. I’m more interested in discovery methods than the actual discovery.