Hi, Jay,
Been lurking with nothing to contribute for the past few weeks. Finally, something you and others might enjoy.
This week's issue of The New Yorker, the money issue, has an interesting report on a terribly bright hedge fund operator who has an unique method (or gimmick). Your thoughts on it are appreciated.
The fellow, Taleb, apparently takes the position that no one, and he means no one, has a clue as to what markets are going to do. Buffett has simply ridden a wave that has an ever higher and higher trend. Geniuses like the folks who ran LTCM ignored the role of pure dumb chance in their highly sophisticated calculations. In LTCM's case, of course, the stray bullet that drilled into its heart was the Russian default. Buffett simply has ridden an ever higher wave, sucking it up when the random event hits. After 9/11, the mother of all random events, Buffett has admitted to his lack of prescience as his insurance companies have taken a huge hit because they did not consider possible terrorism in their premium calculations.
Taleb takes several examples of randomness from his own life, like getting throat cancer when he was young despite the fact that he did not smoke, a fact which accounts for the vast majority of the cases.
He has incorporated his thinking that the market is entirely too random to predict by purchasing lots of long term out-of-the-money options, knowing full well that the majority of them will expire worthless.
Like a proper dung beetle, however, he waits for the huge random event which will cause huge market swings, such as 9/11, because he has calculated that the profits he'll make when the huge random event hits will more than make up for his losses.
Given the storm clouds on the international political scene, it may not be a bad strategy at all.
Your thoughts? |
