I finally got round to reading The Black Swan by Nassim Nicholas Taleb. This is continuing my habit of reading business books about a decade after everyone else.
A “Black Swan” is a highly improbable event that happens much more often than would be expected.
The first thing that struck me is that Taleb and I seem to have read almost exactly the same books over the last couple of decades. I felt that I was experiencing a Black Swan event myself as I turned page after page and came across book after book that had also influenced me.
There’s certainly plenty of things that I would agree with Taleb about. Regular readers of this blog will know that I’m not a fan of using statistical models to drive investing. To paraphrase Joseph Goebbels, “When I hear R-squared I reach for my revolver”. However it’s quite a leap to decide to ignore statistics completely.
I think Taleb goes way off base when he begins to suggest practical advice based on his philosophy. For example: his suggestion to hold bonds over equities. There is enormous historic evidence that equities outperform bonds. It’s also entirely false to view bonds as low risk: virtually all bonds are exposed to the risk of inflation and most bonds are exposed to default. Other than people who are about to experience a short term need for liquidity, bonds are highly unlikely to be a good investment*. It’s a classic case of heads I win (growth goes to equity holders and bonds may be called if they end up delivering good value) and tails you lose (business failure will result in wipeout of bondholders) proposition.
Equally, his suggestion to focus on good Black Swans (i.e. very high growth businesses) is a very poor recommendation for the average investor. It is true that Diet Chef returned 89,999,900% over three years but it’s hardly good advice to suggest most investors should look for these opportunities. It’s not reasonable to expect most investors to identify these start ups in advance. It is however a very high risk area that is likely to result in destruction of hard earned savings.
A much better way to look at investing is that it is multi modal. You need to understand the industry, accountancy, classical economics, behavioural economics, marketing, psychology, statistics, software and other areas too.
It’s massively flawed to adopt a single criteria and Taleb does an excellent job of demolishing the case for an entirely statistical based approach. But he goes too far by suggesting statistics are completely without value.
As is so often the case, truth lies in a middle ground. Statistics are very important but can’t be relied on exclusively.
I think a big problem business books have is that it’s very hard to write a book saying that investing is a huge grey area that is best tackled using dozens of techniques but not relying on anything exclusively and accepting that you will make mistakes. People want a simple certainty in their business books.
Classical statistics are a bit like my sat nav. It’s not 100% accurate so I wouldn’t want to rely on it completely but neither would I completely ignore it.
The Black Swan would have been a better book if Taleb had done his takedown of statistical models but then said that they are a useful datapoint but should not be relied on exclusively, rather than saying that they are completely useless.
* The £1.5 million issue of Move Fresh bonds are obviously the exception that proves the rule with their exceptional 7% yield. I bought some myself.