CNBC thinks Taleb is a bad trader

June 17, 2009 in Finance

More on Taleb: CNBC is running a piece called "Swan Song: Why Nassim Taleb is Still Wrong."

The crux of the argument seems to be this paragraph:

Arguing against Taleb is a little embarrassing; who among us wants to side with the plodders when for the price of a paperback you can join the elect? But the experience of the markets here is important because it shows that neither consistently discounting the chance of unforeseen risks, as AIG did with such gusto, nor betting day after day on unforeseen catastrophes is a reliable way to make money.

And why isn't it a "reliable way" to make money? Because it doesn't make money every day! CNBC points out that "the problem with catastrophism, however, is that it's very difficult for anyone in the market to wait around for the unexpected." Why is it hard to wait? I'm going to guess it's because CNBC wouldn't attract many viewers if they ran segments called "Day 145: Hang in there, the black swan is coming!"

Further exemplifying their short-sightedness, CNBC's piece takes a few jabs at Taleb for not being an "investor" (read: person who can make you money all the time). They note that "little of his 2004 book, Fooled by Randomness, and even less of The Black Swan talks about investing directly" and also how "he moved through several trading jobs without much success." It makes you wonder why CNBC is wasting space on this bad trader's strategy? (All in the name of sensationalism, of course).

The most bizarre thing is the comparison of Taleb and AIG:

But the failures of the Niederhoffers and AIGs do not translate to a validation of Taleb-style catastrophism because these two approaches turn out to be linked. They are mirror images. In noncatastrophic times, the Niederhoffers and AIGs make money consistently and quietly and then end up losing it conspicuously and painfully. The Talebs make money rarely, amaze everyone because they do it when everybody else is getting killed—and so make it easy to forget about years of steady losses.

They aren't mirror images! If they are, then how can only one side be out of business and "responsible" for the black swan of 2008? CNBC actually thinks that losing small amounts of money 90% of the time and making massive amounts 10% of the time is the flip side of AIG-style investing? Have they never heard of a skewed distribution? The very goal of "portfolio management" is constructing portfolios with positive mean and positive skew - and now that Taleb has achieved that, they are slamming him because the majority of the time he loses relatively small amounts of money - an intentional characteristic of his portfolio? AIG would kill not to have held a negatively skewed portfolio in 2008.

Aside from the rest of their strange take on statistics, CNBC is forgetting that there is a limited amount of capital at play, and when you run out you're done. This is a common gambling mistake. When you sit at a casino table and have a 48% chance of winning each hand, your chances of losing are actually much higher across many hands than you'd think. This is because it only takes a few bad hands before you lose all your money and have to walk away - at some point, you surrender your ability to make more money.

So it is with investing. If you lose all your money in a catastrophe, you're done. The effort to earn back your losses will be extremely difficult if not impossible. However, is you lose a small amount of money steadily, then you don't have to worry about hitting the zero-capital floor so long as periodically you experience an event that nets you a gain.

Taleb's point in The Black Swan is not to illustrate a manner of investing; it's to point out that we discount the frequency of those unlikely events. His decision to put his money where his mouth is is admirable - and not just because his strategy works.

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