The Antifragile Investor
Nassim Nicholas Taleb wrote an insightful book “Antifragile: Things that gain from disorder”. The concept is so powerful and relevant not only to investing but our life in general. I thought of doing a short piece highlighting a simple concept helping you to become an Antifragile Investor.
First things First. Some definitions.
Fragile – Things that break under pressure.
Resilient –Things that can withstand pressure and stay the same.
Anti-Fragile- Things that grow stronger with pressure (or shocks).
Author Taleb starts off with a powerful line in the Prologue, “Wind extinguishes a Candle and energizes fire.” In short, he says that a wind can blow off any candle while spreading fires making them stronger. The whole concept of Antifragile is based on this simple yet powerful thought “Some things benefit from shocks; they thrive and grow when exposed to volatility, randomness, disorder and stressors”. A look at our current environment and we will see many examples of fragile, resilient and antifragile companies, and people.
So how does one really become an Antifragile Investor in this chaotic world. The answer lies in this simple yet powerful “Barbell” strategy. We have all been exposed to Barbells in the gym. What do you think is common in all the barbells in your gym or home? Both sides have equal weights. Have you ever seen a Barbell which is heavy on one hand and lighter on the other? What happens if we put more weight on one side and very little on the other? You can never exercise with an uneven barbell and it can also injure you. This is exactly what happens to most investors as they invest with uneven barbells. Confused! Let me explain.
Most investors are too aggressive or too conservative. Yes, I know people say they are balanced but then one still sees a lot of money not required in the next 15- 30 years in bonds and fixed deposits. Very rarely do we see investors who are super conservative and super aggressive at the same time. This is the essence of the barbell strategy: being super conservative and super aggressive at the same time. Yes, it is totally possible and this is how you do it.
There are multiple ways to do this and I share a way for literacy purposes only. You should seek the counsel of a real professional before you attempt it yourself. This is how Ajay Sharma (name changed), an Antifragile Investor does it. He invests all Long-Term money into a Diversified Portfolio of Equities (through mutual funds). He has Zero allocation to Debt. This is how Ajay is Super Aggressive. I am not getting into the Sectoral exposure or private company exposures he has. The money he does not require in the short term goes into Equity only. His cash flow is stable. He is comfortable with the volatility of the markets (he understands it’s normal) and he knows that the value of the best companies goes up during such times (only their price goes down). This is how Ajay is acting Super Aggressive. At the same time, he keeps funds that he requires in the short term or unforeseen cash requirements that might come up (strategically or opportunistically) in Liquid Funds only. This is being Super Conservative. Ajay keeps higher than the traditional recommended levels in Liquid. Now this Super Conservativeness allows him to be Super Aggressive at the same time with most of the investments. He did not worry or panic when the markets nosedived in February/March 2020. In fact, he bought and has made stellar/abnormal returns in the last several months. Beyond the fact that he had the right behaviours of a successful investor (and the fact he avoids the financial porn of the media), he has the choice because of his super conservative investments to not panic. Additionally, the Antifragile Investors find comfort to invest whenever they have the money to invest. They do not waste time in even thinking about timing the markets. They know that while they are investing now, they are not investing for NOW or even for the next 1 year. They are investing for the future.
The classic mistake that most investors make is either being too aggressive by investing everything in equity or being too conservative by investing the majority in debt. The barbell approach is an optimal approach to investing and can help you address some of the classic behavioural mistakes that people fall into. Needless to say, Human Stupidity is infinite, and no approach is thus full proof and is always only good as the person who is using it.
I end this post with one of the author’s gems on the concept. “Antifragility has a singular property of allowing us to deal with the unknown, to do things without understanding them – and do them well. Let me be more aggressive: we are largely better at doing than we are at thinking, thanks to Antifragility. I’d rather be dumb and antifragile than extremely smart and fragile, any time.”
Thus, the equation for successful investors: Dumb and Antifragile >>>>>> Extremely Smart and Fragile.