[mlchild]

Not to kneejerk defend Taleb, but I believe his stated position is that he loses money on his trades almost all the time, and then makes it all back and more when a black swan event occurs. I don't believe a black swan has occurred in the treasury market in the last 5 years, so it would be interesting to hear if he's still waiting for one there.

[aswanson]

That sounds insane. How can you wait for a black swan to clean up all your losses? That's a strategy? By definition, a black swan is unpredictable.

[noname123]

If you're interested, here's a good article behind rationale and personality of Nassim Taleb's strategy. http://gladwell.com/blowing-up/

Everything in options trading is probability-based. So you can either buy a $1 lottery ticket that wins $1000 for 0.01% time, or sell a $1 lottery ticket to one counterparty that may only be redeemed for $1000 for 0.01% of time.

So for the lottery buyer, you know you're going to lose most of the time; so you size your bets accordingly to your expected value (formally known as Kelly's Criterion) to ensure that you still have enough stake while you're losing most of the time to keep betting and win in the long run when your loss rate regresses to the mean probability.

Likewise, the lottery seller's P&L profile is like an insurance disaster company. On most days, you steadily collect the insurance premium from your policyholders. But you have to size your "risk pool" and watch it carefully to ensure that you are well-capitalized to be able to pay out insurance claims when disasters hit. And if your expected value, again with Kelly's is no longer viable, you'll have to either sell your insurance policies to another trader or buy a hedge to re-insure yourself (formally known as keeping delta, gamma or vega neutral depending on the risk type in the options market).

Nassim Taleb's strategy involves mostly buying option straddles on indices and also large-cap blue chips. With options, based on expiration date and the current market's implied volatility, he can pick and choose accordingly the daily "loss rate" he is willing to take and also more importantly, what he thinks the market's "real volatility" level should be over the current "implied volatility" expressed in the options pricing.

So by sizing his bets properly, choosing an option series that limits his daily decay and expresses his opinion about volatility, he is able to make money over the long run (e.g., 2008 when the market mispriced volatility and VIX shot up to 200 and SPY went down a lot; his straddle gained in both implied and realized volatility).

[PhantomGremlin]

There is an extensive Wikipedia article[1] on this topic. Here's an excerpt:

   In economics and finance, a Taleb distribution
   is a returns profile that appears at times
   deceptively low-risk with steady returns, but
   experiences periodically catastrophic drawdowns.

The general idea is that because black swans occur infrequently, their risk is significantly under priced by most people.

NB: Taleb does not advocate investing using a Taleb distribution; instead he warns against that sort of investing.

[1] https://en.wikipedia.org/wiki/Taleb_distribution

[JacobAldridge]

By definition, a specific Black Swan is unpredictable, but in general the likelihood of any Black Swan event is higher than the markets factor in.

You'll never pick the day it happens. But if you invest everyday, eventually you'll be right (according to the theory). Take a trade that will almost certainly lose you 1% per annum BUT, in a Black Swan event will return you 1000%. Every year you 'bleed', and it takes guts to keep investing. Then one day something hits the fan, and you were the only one exposed to the upside.

[aswanson]

Sounds like a naive implementation of venture capital investing. But I like VC's upside better.