the black swan

[CCdaCE]

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Originally Posted by twaddle Yeah, that thing about crusing for 50 years on my faith in the markets is what keeps me glued to this site. That's as close to a religious faith as an atheist can get, and I need this church to keep the faith. BTW, I've mentioned Swedroe's 30/70 portfolio before. In theory, that should perform as well as 100% S&P 500 with 1/2 the volatility, but he'll freely admit that the hard part of maintaining that allocation is the wild tracking error.

I was thinking that Bernstein's book (Four Pillars) said that 60/40 was pretty close to the leading edge of the efficient frontier (most return for the risk). But, damned if I can find a chart in the book. Efficient frontier isn't even listed in the index. Must be thinking of something online that I'm too lazy to look for.

Anyway, Bogle must believe it too since Wellington is based on that allocation.

Not to nitpick 60/40 vs. 70/30. It's like arguing which blond cheerleader is hotter. I just always thought/read that 60/40 was pretty close to the "magic number", but 70/30 is perhaps better. After all, it's all based on the past.

-CC

[twaddle]

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Originally Posted by CCdaCE Not to nitpick 60/40 vs. 70/30.

Swedroe's allocation is 30/70. 70% bonds. A fairly radical departure from conventional wisdom, but perfectly consistent with Fama and French data.

[unclemick]

Swedroe's perhaps 'other radical departure' is in the 30% he is deliberately picking high expected return asset classes and has done a lot of research on variations of volitility over time(changing correlations under different periods of market stress). The fixed provides steady income while the smaller amount of concentrated stock does the heavy lifting as time rolls on.

heh heh heh - not sure where this fits with the Black Swan - but clearly more robust than my vanilla 60/40 able to retreat to current yield via cut expenses in hard times and taking a shot at Jimmy Buffett land with a few individual stocks on the side.

Speaking standard deviation wise I mean!

[twaddle]

Exactamundo. Like Taleb, he's concentrating risk in a small portion of his portfolio, and the bulk of his porfolio is for capital preservation.

[CCdaCE]

Quote:

Originally Posted by twaddle Swedroe's allocation is 30/70. 70% bonds. A fairly radical departure from conventional wisdom, but perfectly consistent with Fama and French data.

Ahh! 30/70 not 70/30. Worlds apart! Nevermind me, then. Figured I had to be missing something. Turns out I just can't read.

-CC

[CCdaCE]

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Originally Posted by greg <snip> His perception is that there are lots of looming and unforseen negative possibilities, with profound complications possible, skirting around out there in "just beyond our sight land." He says more so than in the past in his book. One of my arguments against this notion is that folks always feel that way and have thruout history. It is just that the objects of worry were different then: maybe folks worried that they had syphilis, might be facing a drought or nearby plague, worried that the Huns were just over the hill, and dealing with dysentery that a child might have, they faced just as many if not more Black Swans or possible tragic events than we do today. I truly think his speculative perceptions regarding increasing frequency of black swans are off base. Life doesn't get any larger or smaller than "You're now dead." <snip>

So, do you think the frequency of "bad" events has decreased and severity increased? Some other combination, like same frequency, AND increased severity?

To me, as we become "more efficient", and "one farm" processes, say, spinach for 100's or 1000's of stores, a "low frequency" event becomes a big, bad outcome affecting large numbers of people. Bad outcomes are leveraged nowadays.

You can argue the issues I've put in quotes, but hopefully the point I'm trying to make is clear.

-CC

[greg]

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Originally Posted by ERD50 I've read Taleb's 'Fooled by Randomness'. I thought it was a very good book to bring a different perspective to risk in your portfolio. I really think about some of the ideas when I look at the risk in my portfolio. It sounds like the Black Swan book is similar. What I'm not certain I agree with though, is that you can turn these theories around to make money, rather than just not losing money. Is there anything in Black Swan that talks about *making* money? I have heard him talk about buying these far out-of-the-money puts, his theory is that they are undervalued because of this supposed misunderstanding of risk. But I'm not sure an individual (or even a group) can take advantage of these regularly enough to make money year to year. It doesn't help if you go broke the month before you were going to get the big pay-off. IMO, Taleb is trading off the risk of a blow-up with the risk of slowly running out of cash. Waiting for a Black Swan event in order to make money may be like waiting for Godot. -ERD50

After reading The Black Swan, I didn't see too much regarding actual tactics for making money. It was mostly arguments for his perception of how the world works. The statistic insights and other number stuff were good, as were some of his psychological insights. But . . . .

My thoughts while reading it, with his mention of trying to find asymmetrical risks (and which I thought were very hard to find unless one corralled a significant number of rocket scientists or a number of insiders to work for you) was just the difficulty of it all. I was repeatedly reminded of what Ha said about simply using puts or calls just out of the money to sort of leverage up your 10% risk capital. But even here, with Taleb's belief in the dark side of the market and that puts were the primary way to go, I didn't see consistent returns, just protection from worst case events--a sort of half solution to a half problem.

An alternative-to my mind-was looking for patterns in, say, the DOW or S&P 500, were one could use those patterns of longer term chart ups and downs to identify a switch to index puts or calls: for instance, if the market has been going up for five years and it usually goes up for only four without a significant correction, then you should be handily in puts. Or near or at the bottom of the correction, you should be in calls. All pretty simple and straight forward. You're always mildly engaged in forecasting the general market trends, participating with a smallish amount proportion of your portfolio, and always anticipating a reallocation process. You don't sit there in quiet desperation as your money slowly trickles away waiting for some unseeable and unknowable black swan to suddenly poop. You stay a bit more attentive and alert to the market (and real things) . . . . . but you also turn into a dirty little market timer with the different probabilities and problems they face. And you avoid thinking about all those Black Swans that Taleb sees--at least half the time anyway.

Another problem with Taleb as I see him is that he couldn't really see beyond anything except possible negative outcomes for the market in this book. His whole argument was build around a dark and gloomy future with no relief in sight into an unforeseeable future. I just don't see that singular monotone of a pattern out there. I still see up and down patterns--but mostly up.

[twaddle]

I believe Taleb has described his trading style as "short volatility and long convexity." I understand the words, but not the implementation or track record, so I've decided to pass for now.

[Rich_by_the_Bay]

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Originally Posted by greg After reading The Black Swan, I didn't see too much regarding actual tactics for making money.

I think this book was his attempt to generalize the phenomenon from his prior financial framework to a more life-based framework. As I wrote earlier, this generates some interesting questions, but he failed to make a coherent case for anything I could identify.

BTW, he also totally disregards the "gold swan" phenomenon (my term) - those unpredictable nonroutine turns of events which bring unexpected benefit (the lottery win, lucky stock pick, unawaited inheritance, dramatic housing value increase, etc.). Certainly if you choose to account for black swans you've got to consider the gold ones, too.

[greg]

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Originally Posted by CCdaCE So, do you think the frequency of "bad" events has decreased and severity increased? Some other combination, like same frequency, AND increased severity? To me, as we become "more efficient", and "one farm" processes, say, spinach for 100's or 1000's of stores, a "low frequency" event becomes a big, bad outcome affecting large numbers of people. Bad outcomes are leveraged nowadays. You can argue the issues I've put in quotes, but hopefully the point I'm trying to make is clear. -CC

OK, I can do that. I think there are lots of things that folks and groups and companies and gov'ts do and do very well. But I always think there's room for improvement, which is the other side of the coin. We have the present and the future, and we are always trying to bring more of the good stuff of the present into our futures. We try to give our kids the best part of ourselves; we give them our Lexus money so that they can help give them an education; we want them to have fewer problems than we have and reduction of ignorance is always the first step. Do we fail sometimes or fall short? Yup. Are there ways of repairing that failure? Yup. Should we focus more on doing positive things to fix problems rather than looking for destructive solutions that take things away or muck them up further? Yup.

But also, yes, I think technology has appeared to leverage up the possibility of doing great harm. And we have seen that happen with the spinach issue you mentioned, where, I think, some e coli or something got on the stuff and spread all over the place. But this has probably happened many, many times in our past, and maybe with smaller but more frequent events. And maybe the national news just wasn't around to spread the scariness as far out or as quickly--or with such vivid images--either.

But we do nowadays have planes seeming to come from nowhere and hitting buildings. And we have done things about such problems as they arise. We lever up a Homeland Security Dept really fast. We see a patten and interfere to make sure it stops if it is a negative patterned event. If we see a positive pattern, such as micro loans in Asia, which are a cheap way of helping folks bootstrap themselves out of poverty, we can leverage things up very quickly if we want to--if we are not so busy focused on some Black Swan--and filled with anxiety. Companies fix vegatable problems all the time, especially if they don't panic and try to hide it or screw it up with excess worry or self interest issues.

Nothing is worse than a feeling of unforeseen creepiness 'out there' on the edge of darkness. That creepiness and anxiety can interfere with seeing or correcting a problem correctly. And greed can interfere with such perceptive skills also if it overwhelms folks.

I guess I don't quite see the issue of modern technology overwhelming us and causing a whole new class of intractable problems. We can simply and straightforwardly lever that technology stuff up to solve those very problems it creates in the first place if we bother to.

[haha]

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Originally Posted by Rich_in_Tampa BTW, he also totally disregards the "gold swan" phenomenon (my term) - those unpredictable nonroutine turns of events which bring unexpected benefit (the lottery win, lucky stock pick, unawaited inheritance, dramatic housing value increase, etc.). Certainly if you choose to account for black swans you've got to consider the gold ones, too.

A Black Swan is not called black because of emotional color or effects on one's life-it is called a black swan in a purely statistical sense- you go all your life seeing only white swans-but this only proves that there are many white swans, not that all swans are white. Furthermore, he does talk of beneficial Black Swans in his book. An example is runaway book sales, as for example the Harry Potter phenomenon. In fact, his book Black Swan is an example of a beneficial black swan. He also discusses the random nature of big success in the arts or even science. In a sense, the winners are all beneficial (to them anyway) black swans.

To address Greg's question of his bearishness, he does seem to be a dour person. However nothing that I remember about his trading methods suggest that he only buys puts- he would buy puts and also calls, depending on what factors I don't think he ever says. What he would not advocate is to sell-naked either puts or calls.

Ha

[greg]

Ha:

I once read one of Karl Popper's books regarding the Black Swan issue. It's an old empirical conundrum of using external evidence to verify or create a law, usually regarding scientific rules. We may say that 'all swans are white,' but there is always the possibility of a non-white one. Another common empirical/epistomological question is "Is there a color grue out there somewhere?" Could there be a color that we as humans have never seen that could pop up someday, somewhere? In other words, no inductively derived law can ever be proven beyond all shadow of doubt. Scientists hate messiness. They want yes/no answers. Philosophers think they help matters.

Also, my problem when I read someone is that if he or she spends most of his time discussing one side of an issue, in this case negative Black Swans, I infer that he thinks that issue is proportionally more important.

[bosco]

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Originally Posted by greg Ha: Another common empirical/epistomological question is "Is there a color grue out there somewhere?" Could there be a color that we as humans have never seen that could pop up someday, somewhere? In other words, no inductively derived law can ever be proven beyond all shadow of doubt. Scientists hate messiness. They want yes/no answers. Philosophers think they help matters.

Since the naming of colours is somewhat by convention, and other cultures slice up the visible light spectrum differently, my response would be "the colour grue is out there as soon as you identify and name it and get general agreement on what it is." Of course, it would probably be some shade that women knew already but men didn't..

On a more physical level, the visible light spectrum has been well investigated, and it's pretty inconceivable that there are any unexplored "gaps" in it. To show that there are not unexplored gaps would certainly be doable if it has not yet been done. Therefore it is difficult to see where any heretofore unseen colour might come from. Unless it comes from a different faculty than human sight in which case is it really a colour? Or, what about physical enhancement to include areas of the non-visible spectrum?

A (to me) more interesting, if equally silly philosophical dilemma was "last night everything doubled in size, but all the proportions remained the same." This one is also hard to disprove. However, if true, what real difference would it make?

My first degree was in philosophy. I don't think I was a very good candidate as a philosopher. I found much of what was presented to be fascinating, and much that just seemed silly, in the same vein as how many angels can dance on the head of a pin. The professors didn't seem to think any of it was silly.

Back on topic, I haven't read Black Swan, but I thought Fooled by Randomness was well worth the read.

[greg]

bosco:

As I see it, the grue stuff really becomes important when trying to figure out how the advancement of science takes place. Are there patterns that can be identified and then seen to appear again attached to different objects? Or is everything different each time around? How do we look for things? Karl Popper really fleshed out how he thought that worked in the book I read many years ago. He examined the transition from Ptolemyic heavens to the Copernican one we still use for navigation. Interesting read. Taleb offered no advancement, just a bit of spin mixed with a number of good bits and pieces.

But silliness abounds too:

[bssc]

Quote:

Originally Posted by bosco Since the naming of colours is somewhat by convention, and other cultures slice up the visible light spectrum differently, my response would be "the colour grue is out there as soon as you identify and name it and get general agreement on what it is." Of course, it would probably be some shade that women knew already but men didn't..

Maybe not with colors but definitely products. You bring out a product and get everyone to agree that it is a must have (versus niche gadget or piece of junk). I doubt many people would have predicted that the iPod would be Apple's golden swan (I like that term).

[bosco]

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Originally Posted by greg bosco: As I see it, the grue stuff really becomes important when trying to figure out how the advancement of science takes place. Are there patterns that can be identified and then seen to appear again attached to different objects? Or is everything different each time around? How do we look for things? Karl Popper really fleshed out how he thought that worked in the book I read many years ago. He examined the transition from Ptolemyic heavens to the Copernican one we still use for navigation. Interesting read. Taleb offered no advancement, just a bit of spin mixed with a number of good bits and pieces. But silliness abounds too:

I haven't read Popper but I see the "philosophy of science meets epistemology" concern. Haven't thought about this stuff in a long time--probably since I read Thomas Kuhn's "Structure of Scientific Revolutions" which was long ago. My philosophical study mostly centered around logic, both western and eastern. I've forgotten most of it, but remember how blown away I was when I realized that a "double negative equals a positive" was just an arbitrary convention after confronting an Indian system that was consistent and held that two negatives were still negative but three generated a positive (Nyaya Vaisheshika if I recall). Of course, the Buddhists insisted two negatives made a positive.

That's when I realized that not only could there be many logics, but possible sciences and scientific methodologies as well, and started thinking of science as more of a belief system than as "truth". What did I do with the realization? Not much. Became an engineer. Although I always felt it gave me a little different outlook on things than many of my colleagues.

As for Taleb's book offering no advancement, I haven't read it yet so I can't comment. However, think how we could trim down the Library of Congress if we expected advancement as a criterion in a book!

[greg]

Quote:

Originally Posted by bosco I haven't read Popper but I see the "philosophy of science meets epistemology" concern. Haven't thought about this stuff in a long time--probably since I read Thomas Kuhn's "Structure of Scientific Revolutions" which was long ago. My philosophical study mostly centered around logic, both western and eastern. I've forgotten most of it, but remember how blown away I was when I realized that a "double negative equals a positive" was just an arbitrary convention after confronting an Indian system that was consistent and held that two negatives were still negative but three generated a positive (Nyaya Vaisheshika if I recall). Of course, the Buddhists insisted two negatives made a positive. That's when I realized that not only could there be many logics, but possible sciences and scientific methodologies as well, and started thinking of science as more of a belief system than as "truth". What did I do with the realization? Not much. Became an engineer. Although I always felt it gave me a little different outlook on things than many of my colleagues. As for Taleb's book offering no advancement, I haven't read it yet so I can't comment. However, think how we could trim down the Library of Congress if we expected advancement as a criterion in a book!

You may remember that I'm a Platonist, as best as I can. When I first started reading him, I ended up also reading a fair amount of commentary by philosophers discussing the meaning of Plato's writings. Most of that commentary,was from Platonic Dualists . I, at that point, was just starting to see Plato as a Monist--which I still think he is. [Dualist: someone who sees, for instance, both good and evil in the world; Monist: someone who sees only good and perhaps some residual lack of good, but no intrinsic evil, just distance from good, e.g. Hitler wasn't evil, he was stupid.] This radically changed how I saw every sentence in his collected writings. And it had a significant effect on my perceptions of the real world. It still holds sway.

My inital guess with numbers is that in the Indian system where non-being and* non-being will still equal non-being (two negatives equal a negative but three of them don't) is a monistic system. And it allows three negatives to become positive. That's just a guess because I probably won't read Viasheshika. To my mind and I believe this about most logicians, changed perceptions of reality are outside the box of logic; for the most part they are working at divying up common perceptions and then using them. Like mathematicians they work with a number system they've been given. No new number twur--or Brazilion--for them. Such a thing would be a an overwhelming surprise, like a black swan.

But wouldn't it be nice if there was a rating system for books nowadays that wasn't simply a popularity contest? This wouldn't encourage tautologies.