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"AntiFragile" Portfolio


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Nassim Taleb coined "Anti-Fragile" to represent an entitiy that not only is resistant to breaking but actually gets stronger after suffering a setback.  Antifgragile can be applied to economies, individual personalities, and the investment markets. Berkshire Hathaway could be an example of an equity that is "antifragile" - comes back even stronger when it takes a beating.

 

When setting up a personal portfolio in the anti-fragile model what would one own? BRK? Is FFH "antifragile"?  What equities or funds/fund managers do you consider to be "antifragile"?

Caveat is you are a long term value investor and have the ability to tolerate downturns. 

 

 

 

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It's a good question. BRK and FFH - with large cash hoards - are probably pretty good bets. I've been trying to shift my own portfolio towards businesses that can take advantage of a downturn - either through M&A or aggressive buybacks - but without paying up for it. But one thing is having the biz to navigate in a downturn, I think management is even more important. Here are some of my owns picks as well as reasoning;

 

Autozone: My thesis is basically that the Amazon fear is way overblown, they should have a tailwind from more cars in their sweet spot (age wise) and then you get superb capital allocation/management that actually levered up a bit during the GFC to buy back shares. Plus, in a recession, more people tend to fix their own cars.

 

Autonation: While car sales are cyclical, O&M is not, and thus it generates healthy cash flows in a recession. Like Autozone it is a proven cannibal and does low-risk M&A as well (buying other dealers).

 

Interactive Brokers: Well, maybe not so much anti-fragile, but there's some option value if we get increased volatility.

 

And then I have (over?)levered stuff like HC2 Holdings and Supervalu that might get absolutely fucked in a downturn and probably has too little wiggle room within their covenants and overall debt load.

 

I also like distributors and am a bit annoyed I missed MSC Industrial at 65/share, since it - like other distributors - releases WC and turns it into cash when a downturn hits. And has proven it'll mix M&A with buybacks - whatever makes most sense.

 

So, I'm not really there yet (AZO, AN and IBKR makes up some 40 pct. of portfolio), but it's difficult to find value with these attributes.

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CSU.to

 

Diversified across hundreds of niche businesses (in multiple industries) that tend to dominate their niches and be very sticky with customers (highly recurring revenue, negative working capital), as well as diversified geographically. Asset-light (the assets mostly go home at night + IP, so highly variable costs), little debt (mostly long-term and non-callable), proven track record of capital allocation, in a downturn they will be able to deploy more capital at higher rates (they're already getting ROICs in the 30s) and maybe snag some bigger businesses.

 

When things go well it should do fine, as it has in recent years, and when things go south, it should create lots of value through M&A or by taking share from less well-funded mom & pops operations. Even in very tough economic circumstances it'd be extremely hard to kill (the last thing its customers will cut is the software that runs their back-end operations and allow them to operate and make money -- that software is typically a small fraction of their total costs anyway).

 

Worse case scenario is they can't deploy capital through M&A at a decent rate, in which case the multiple would compress a few turns and they'd start returning excess capital through special dividends and invest more into organic growth initiatives. Hardly a catastrophic risk.

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Oddly enough, as someone who's shied away from the stock for reasons relating to it's valuation and fears of it blowing up during a recession, I'd say AMZN. Any economic slowdown would crush most retailers, making AMZN even stronger.

 

MSG is a stock I'd consider unbreakable simply because of the balance sheet and exposure to assets that typically trounce inflation.

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Guest Cameron

Bitcoin, Overstock, Nvidia, Tesla, and the 3x leveraged semiconductor ETF, auto dealers, manufacturers, and financiers. Recession proof.

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Nassim Taleb coined "Anti-Fragile" to represent an entitiy that not only is resistant to breaking but actually gets stronger after suffering a setback.  Antifgragile can be applied to economies, individual personalities, and the investment markets. Berkshire Hathaway could be an example of an equity that is "antifragile" - comes back even stronger when it takes a beating.

 

When setting up a personal portfolio in the anti-fragile model what would one own? BRK? Is FFH "antifragile"?  What equities or funds/fund managers do you consider to be "antifragile"?

Caveat is you are a long term value investor and have the ability to tolerate downturns.

 

You want to look for something that gains market share or can buy distressed assets or be a cannibal during a downturn. Many options here:

 

Brookfield Asset Management

Oaktree Capital

Constellation Software

Interactive Brokers (trading volume spikes in volatile markets)

Industrial distributors (FCF increases as they reduce inventory and collect receivables)

CVS - Non-cyclical cannibal trading at a cheap valuation (cannibal thesis disappears if they buy Aetna)

BRK (can do distressed deals like BAC and can get better pricing for insurance)

NVR

CACC

Liberty Complex (e.g. SIRI acquisition) - though debt can be a problem here

AN/AZO

 

Non-obvious examples were WFC (and possibly JPM) during the financial crisis. They were able to buy distressed assets, capture deposits from weaker institutions, etc

 

But this is generally true for the stronger (and smarter) companies during a sector crash. Canadian Natural Resources did a pretty good job buying assets during the oil crash. It wasn't anti-fragile, but it managed to maintain it's value and is now leveraged to any upturn in oil prices.

 

A few key ingredients: good capital allocators, cash (or at least low leverage), strong FCF.

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Nassim Taleb coined "Anti-Fragile" to represent an entitiy that not only is resistant to breaking but actually gets stronger after suffering a setback.  Antifgragile can be applied to economies, individual personalities, and the investment markets. Berkshire Hathaway could be an example of an equity that is "antifragile" - comes back even stronger when it takes a beating.

 

When setting up a personal portfolio in the anti-fragile model what would one own? BRK? Is FFH "antifragile"?  What equities or funds/fund managers do you consider to be "antifragile"?

Caveat is you are a long term value investor and have the ability to tolerate downturns.

 

You want to look for something that gains market share or can buy distressed assets or be a cannibal during a downturn. Many options here:

 

Brookfield Asset Management

Oaktree Capital

Constellation Software

Interactive Brokers (trading volume spikes in volatile markets)

Industrial distributors (FCF increases as they reduce inventory and collect receivables)

CVS - Non-cyclical cannibal trading at a cheap valuation (cannibal thesis disappears if they buy Aetna)

BRK (can do distressed deals like BAC and can get better pricing for insurance)

NVR

CACC

Liberty Complex (e.g. SIRI acquisition) - though debt can be a problem here

AN/AZO

 

Non-obvious examples were WFC (and possibly JPM) during the financial crisis. They were able to buy distressed assets, capture deposits from weaker institutions, etc

 

But this is generally true for the stronger (and smarter) companies during a sector crash. Canadian Natural Resources did a pretty good job buying assets during the oil crash. It wasn't anti-fragile, but it managed to maintain it's value and is now leveraged to any upturn in oil prices.

 

A few key ingredients: good capital allocators, cash (or at least low leverage), strong FCF.

 

I like oak tree, but i hate filling for K1. Heard it's possible i would have to file state tax returns for all 50ish states( whereever the incomes are generated). And using an IRA wont always shield it. How others deal with this? Or is my understanding wrong? Thanks!

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I think most of the examples given so far are more in the "robust" category, not anti-fragile.

 

One stock I held about 6 years ago was Alpha Pro Tech (APT). Its market cap was $24m at the time, tangible book value was ~$36m and it had net cash of ~$6m. The company was profitable, but only marginally. The company sold disposable protective apparel and infection control products. Any time a pandemic breaks out, or the flu season is particularly severe, their sales and earnings tend to increase significantly. Just the threat of a major outbreak could make the stock spike as investors speculated on earnings increases.

 

I think that was an anti-fragile investment at the time. At a big discount to tangible book and with a large cash balance, you were unlikely to lose much, but you stood to gain significantly when (the threat of) an epidemic appeared. And major epidemics are certain to occur from time to time. The company benefits from disorder. Any company with a large inventory of potentially vital products that are only rarely scarce could be a candidate.

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Agree on the distinction between robust/durable and antifragile. I'll throw US Lime and Minerals in to the ring here. Digging limestone out of owned quarries is a nice, durable business throwing off lots of free cash flow. USLM's capital management approach is to horde cash, pay a minimal dividend and very occasionally do something with the cash. This element might qualify it as antifragile. In 2012, a large block of stock became available so they did that. There was an acquisition way back. Today, $82 million in cash, no debt, $480m market cap, they could do an acquisition if one became available in a downturn. Not sure many quarries go on sale in downturns, though, as they tend to be very durable businesses. But some decent chance at value creation in a downturn.

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Guest cherzeca

Taleb addresses this in his book.

 

it would involve a barbell strategy, safe assets on one side, and assets possessing a high degree of optionality on the other side.

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Taleb addresses this in his book.

 

it would involve a barbell strategy, safe assets on one side, and assets possessing a high degree of optionality on the other side.

 

Yes. And the companies listed contain a mix of safe assets and optionality. The optionality is provided by superior capital allocators. The safety is offered by FCF and/or balance sheet.

 

They are subject to drawdowns though (which OP said he could stomach). Taleb's strategy would look more like APT (mentioned previously). A flat line. Then a sudden spike.

 

The companies listed in this thread would be expected to have a sharp drawdown followed by a very strong recovery.

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An AntiFragile portfolio is simply one that benefits from significant change - it's just a long straddle on the market that pays off big if the market either booms or busts, within a specified period of time (maturity date of the put and call). A long-short portfolio straddling a specific market disrupter.

 

Select the timeframe (short, medium, long), the disrupter (shortage/glut, technology, etc.), and take your best guess on who wins/loses.

Nothing magical.

 

SD

   

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An AntiFragile portfolio is simply one that benefits from significant change - it's just a long straddle on the market that makes pays off big if the market either booms or busts, within a specified period of time (maturity date of the put and call). A long-short portfolio straddling a specific market disrupter.

 

Select the timeframe (short, medium, long), the disrupter (shortage/glut, technology, etc.), and take your best guess on who wins/loses.

Nothing magical.

 

SD

 

 

I would think that an anti-fragile portfolio is one that will go down when markets tank, but due to its intrinsic DNA/value add/advantage bounces back much stronger as competitors lag, rather than a shorting strategy.

 

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Nassim Taleb coined "Anti-Fragile" to represent an entitiy that not only is resistant to breaking but actually gets stronger after suffering a setback.  Antifgragile can be applied to economies, individual personalities, and the investment markets. Berkshire Hathaway could be an example of an equity that is "antifragile" - comes back even stronger when it takes a beating.

 

When setting up a personal portfolio in the anti-fragile model what would one own? BRK? Is FFH "antifragile"?  What equities or funds/fund managers do you consider to be "antifragile"?

Caveat is you are a long term value investor and have the ability to tolerate downturns.

 

You want to look for something that gains market share or can buy distressed assets or be a cannibal during a downturn. Many options here:

 

Brookfield Asset Management

Oaktree Capital

Constellation Software

Interactive Brokers (trading volume spikes in volatile markets)

Industrial distributors (FCF increases as they reduce inventory and collect receivables)

CVS - Non-cyclical cannibal trading at a cheap valuation (cannibal thesis disappears if they buy Aetna)

BRK (can do distressed deals like BAC and can get better pricing for insurance)

NVR

CACC

Liberty Complex (e.g. SIRI acquisition) - though debt can be a problem here

AN/AZO

 

Non-obvious examples were WFC (and possibly JPM) during the financial crisis. They were able to buy distressed assets, capture deposits from weaker institutions, etc

 

But this is generally true for the stronger (and smarter) companies during a sector crash. Canadian Natural Resources did a pretty good job buying assets during the oil crash. It wasn't anti-fragile, but it managed to maintain it's value and is now leveraged to any upturn in oil prices.

 

A few key ingredients: good capital allocators, cash (or at least low leverage), strong FCF.

 

Thank you. Agree fully with your well worded comment of being able to buy distressed assets or being a "cannibal". Thanks for sharing your insight on the potential cannibals.

 

As we sit at markets at all time highs and low VIX, I would think a portfolio of "anti-fragile" companies could carry on doing well if markets continue upward, but provide the optionality of "winning" by being able to acquire when markets regress. Win-win scenario? Brookfield may fit this model well.

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Agree on the distinction between robust/durable and antifragile. I'll throw US Lime and Minerals in to the ring here. Digging limestone out of owned quarries is a nice, durable business throwing off lots of free cash flow. USLM's capital management approach is to horde cash, pay a minimal dividend and very occasionally do something with the cash. This element might qualify it as antifragile. In 2012, a large block of stock became available so they did that. There was an acquisition way back. Today, $82 million in cash, no debt, $480m market cap, they could do an acquisition if one became available in a downturn. Not sure many quarries go on sale in downturns, though, as they tend to be very durable businesses. But some decent chance at value creation in a downturn.

 

+1 on USLM. Great all around company and investment

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If a concern, building an "AntiFragile" portfolio may involve holding some "AntiFragile" securities, holding cash or somehow hedging risks.

At the company level, it represents the two sides of financial flexibility: to be able to survive AND thrive.

 

Although appealing in nature, true Antifragility has a cost. As Taleb states: "redundancy is ambiguous because it seems like a waste if nothing unusual happens."

 

I would submit that a P+C insurance firm that keeps a high (or very) high cash balance would reach the definition as it could withstand a blow to the asset or liability side and still be able to redeploy funds to opportunistically invest in securities and/or to participate materially in an ensuing hard market.

 

Another area these days would be the firms that belong to an oligopoly and that have relatively low leverage as chaos may represent an opportunity to gain market share.

 

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Guest cherzeca

so, most of these comments do not reflect taleb's view on what would constitute an anti-fragile portfolio.  you really should read his book if you have an interest.

 

antifragility as taleb defines it means that stress strengthens rather than weakens.  really, only biological systems display antifragility (stress a muscle and it gets stronger).  most physical objects either simply resist stress, or weaken under stress; they dont get stonger.

 

taleb rejects the notion that shorting adds to antifragility in your portfolio for the simple reason that a rising market stresses the short and value is destroyed not created. 

 

he says that no portfolio can become truly antifragile, but i think for taleb a portfolio of say 90% treasuries/cash and 10% leaps gets at his objective.  i havent rechecked his book but i seem to recall that this is what he put forth in the book as the closest thing to an antifragile portfolio.

 

 

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so, most of these comments do not reflect taleb's view on what would constitute an anti-fragile portfolio.  you really should read his book if you have an interest.

 

antifragility as taleb defines it means that stress strengthens rather than weakens.  really, only biological systems display antifragility (stress a muscle and it gets stronger).  most physical objects either simply resist stress, or weaken under stress; they dont get stonger.

 

taleb rejects the notion that shorting adds to antifragility in your portfolio for the simple reason that a rising market stresses the short and value is destroyed not created. 

 

he says that no portfolio can become truly antifragile, but i think for taleb a portfolio of say 90% treasuries/cash and 10% leaps gets at his objective.  i havent rechecked his book but i seem to recall that this is what he put forth in the book as the closest thing to an antifragile portfolio.

 

Thanks. I did enjoy Taleb's book, Antifragile, but it was challenging to read. It's been a couple of years. You are right, I should look at it again.

A 90% cash portfolio wouldn't "strengthen under stress", so don't see why that would be "anti fragile".

 

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antifragility as taleb defines it means that stress strengthens rather than weakens.  really, only biological systems display antifragility (stress a muscle and it gets stronger).  most physical objects either simply resist stress, or weaken under stress; they dont get stonger.

 

So let's realize that stress does not directly cause strengthening. Stressing a muscle creates microtears in the muscle fibers, which then regrow stronger. You're looking for companies that survive the initial stress, and transform into something which can deal with the previous stress.

 

Everyone gets hurt in times of stress. It's the survivors that matter. And sometimes they will make less money post-stress, in absolute terms. But their business model is more resilient (albeit smaller).

 

So the trick (I think) is to look for places of stress. And see who survived, and ask the question 'why did they survive, what did they change?'

 

You could argue that the big banks have gotten stronger as a result of the stress in 2008/9. Almost all internal controls have improved. Or, alternatively, the Federal Reserve got stronger in terms of regulating the banks.

 

Look at companies transitioning post-Internet shopping. Content creators are more in control of their content than ever before. TV networks can release their shows directly on their website (i.e. HBO).

 

You can possibly argue WalMart is stronger post-Amazon, or perhaps Costco...i.e.. the brick/mortars which are still alive. They naturally lost a lot of foot-traffic due to Amazon, but have dealt with that stress and are still alive and kicking. They were forced to transform their operations to a leaner, more efficient operation.

 

 

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Guest cherzeca

@investmd

agreed, no portfolio can be truly antifragile without knowing in advance the form of stress.  as i recall, taleb takes optionality as a close analogue of antifragility, insofar as the payment for the option is low as compared to the payment for the underlying asset, so that if you lose, you lose smaller than if you had owned the underlying, and if you win, you win greater.  so in taleb's view, a portfolio should have a component that mimics this cost/gain characteristic of an option, but also a component that exhibits strong resilience

 

@lc

i think many companies do have some resemblance of anitfragility insofar as they have optionality. i think amzn is antifragile in the sense that they have converted internal cost centers into external profit centers (AWS).  so a stress (the need to incur cost) has resulted in a gain.

 

 

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Bitcoin, Overstock, Nvidia, Tesla, and the 3x leveraged semiconductor ETF, auto dealers, manufacturers, and financiers. Recession proof.

 

You forgot to mention a basket of high yield bonds. Of course the yield of HY bonds is not so high these days, akin 3-4%, but not to worry, you may lever it up via derivatives (aka total return swaps) and get respectable 6-7%. What possibly could go wrong?

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