Daily Archives: November 25, 2010

Nassim Nicholas Taleb Explains It All

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Nassim Nicholas Taleb has some very useful information for us about how to invest.  The trouble is that he has such a hard time sticking to the point and putting it in terms that we can understand, that I have not figured out how to put into practice what he is telling me.  However, I seem to pick up something on the edge of usefulness each time I read something he has written or listen to him speak.

I was going to post this on my blog when I noticed that RichardH had posted Bill Sharpe ( of CAPM fame) on ‘The Wrong Financial Advisor’.  In my stumbling across the videos below, I read an item `Black Swan’ Author Says Investors Should Sue Nobel for Crisis that quotes remarks by Taleb.

Taleb singled out the Nobel award to Harry Markowitz, Merton Miller and William Sharpe in 1990 for their work on portfolio theory and asset-pricing models.

“People are using Sharpe theory that vastly underestimates the risks they’re taking and overexposes them to equities,” Taleb said. “I’m not blaming them for coming up with the idea, but I’m blaming the Nobel for giving them legitimacy. No one would have taken Markowitz seriously without the Nobel stamp.”

Now for the videos I originally intended to post here

26 Nov 2010

I realized that parts of his message are really simple

  1. We need to have a robust system that can withstand the shock of unpredictable events
  2. Have safety margins so that your survival doesn’t depends on the accuracy of your forecasts
  3. Debt means leverage means more risk. Decrease debt levels.
  4. Concentration increases risk, so diversify
  5. Pay systems that are no bonus without malice – means if you get extra pay (a bonus) when you do well, you should lose pay (malice) if you do poorly
  6. Don’t transform private debt into public debt (i.e. bank bailouts without equity)

Bill Sharpe ( of CAPM fame) on ‘The Wrong Financial Advisor’

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In the 1960’s, four economists (Jack Treynor, William Sharpe, John Lintner, and Jan Mossin) independently developed a theoretical model (the Capital Asset Pricing Model [CAPM]) for determining an asset’s appropriate expected rate of return as a function of its non-diversifiable risk. In 1990, William F. Sharpe, along with Harry Markowitz and Merton Miller, were awarded the Nobel Memorial Prize in Economic Sciences for their contributions to the analysis of financial risk.

Yesterday (23 November 2010), ‘wfsharpe34’ posted an animation to YouTube called, The Wrong Financial Advisor. You might find it amusing.

I have no reason to believe that ‘wfsharpe34’ is not THE Bill Sharpe.

In case you are interested, here is a photo of Bill Sharpe and here is his Nobel Lecture.

I thank my friend, Nalin, for forwarding an email, purporting to be from Bill Sharpe, which points to this video.

-RichardH