"AntiFragile" Portfolio

[james22]

BATS:TAIL

[writser]

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

 

I think it would: in a crisis you'd be able to deploy that cash at very attractive valuations. People mention Berkshire as antifragile because it can make nice acquisitions during a downturn - if you hold cash you can do that yourself. If stocks go down 50% your cash is suddenly worth twice as much.

[Hielko]

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

 

I think it would: in a crisis you'd be able to deploy that cash at very attractive valuations. People mention Berkshire as antifragile because it can make nice acquisitions during a downturn - if you hold cash you can do that yourself. If stocks go down 50% your cash is suddenly worth twice as much.

I guess that depends a bit on the crisis. If stocks go down because the world has changed and expected future earnings and cash flows are lower your cash isn't worth more. The stocks are just worth less. Alternatively it could be that there is a crisis that causes a lack of liquidity, and people sell stocks just to get cash. In that case your cash is indeed worth more now.

[writser]

I guess that depends a bit on the crisis. If stocks go down because the world has changed and expected future earnings and cash flows are lower your cash isn't worth more. The stocks are just worth less.

 

Well, in terms of portfolio management it doesn’t really matter, right? You’d still rather own cash beforehand.

[DocSnowball]

In my field of infectious diseases - companies making next generation antibiotics to treat resistant bacteria, like Paratek and Achaogen are interesting- caveat is it should be a zero to one kind of drug, be available to use inpatient and outpatient and the company although small has a fortress like balance sheet w cash on hand. If economies do well, they do well with tailwinds of aging population, increase in drug resistance in a compounding fashion, and the GAIN act for additional 5 years market exclusivity, or get bought out via big Pharma. If wars/ flu pandemics/ natural disasters occur then after the emergency stage is over there are more infections in the population due to poor sanitation needing treatment. If recessions occur or costs of care keep rising, Insurances want less people admitted to hospitals and pay up for drugs that prevent hospitalizations. Not correlated much with the indexes and worldwide value potential. Thoughts?

[investmd]

In my field of infectious diseases - companies making next generation antibiotics to treat resistant bacteria, like Paratek and Achaogen are interesting- caveat is it should be a zero to one kind of drug, be available to use inpatient and outpatient and the company although small has a fortress like balance sheet w cash on hand. If economies do well, they do well with tailwinds of aging population, increase in drug resistance in a compounding fashion, and the GAIN act for additional 5 years market exclusivity, or get bought out via big Pharma. If wars/ flu pandemics/ natural disasters occur then after the emergency stage is over there are more infections in the population due to poor sanitation needing treatment. If recessions occur or costs of care keep rising, Insurances want less people admitted to hospitals and pay up for drugs that prevent hospitalizations. Not correlated much with the indexes and worldwide value potential. Thoughts?

 

Interesting. Reasonable thesis and good play on specific knowledge you have.  In this case you are making the argument for a macro event and placing bets that it may happen. If there is another "great Recession" unrelated to a plague, it's unlikely that this pharm company may get stronger. It might not survive the downturn. R&D may get halted. Due to recession, drugs won't be bought on patent....Thus, whilst the investment thesis may be sound, it wouldn't be part of an "anti fragile portfolio" in my view.

[SharperDingaan]

Consider when motorcars replaced the horse and buggy; the disrupter was the internal combustion engine.

You did not know how it was going to work out, and had to place your bets PROACTIVELY.

 

The long side of the staddle was easy; any one of the motor car manufacturers, and there were literally hundreds of them.

The short side of the straddle is always harder; it is a LONG POSITION in a industry/company that benefits as the horse/buggy goes into decline. To most people the obvious choice would be to own a labour exchange - earning a commission on finding work for every one of those now former horse and buggy men. No matter what you would get very, very rich - AS LONG AS the motor car was able to disrupt the  horse and buggy industry.

 

Positioning yourself to benefit like this, is the crux of the 'antifragile' portfolio.

 

SD

 

[rkbabang]

Underground bunker with automatic defense perimeter. Mercenary or robot army if there's a lot of extra cash.

 

This thread is going to dogs really fast.

 

You mean like iRobot's new security bot?

 

 

 

Don't worry my security bot doesn't like dogs.

[NeverLoseMoney]

In my field of infectious diseases - companies making next generation antibiotics to treat resistant bacteria, like Paratek and Achaogen are interesting- caveat is it should be a zero to one kind of drug, be available to use inpatient and outpatient and the company although small has a fortress like balance sheet w cash on hand. If economies do well, they do well with tailwinds of aging population, increase in drug resistance in a compounding fashion, and the GAIN act for additional 5 years market exclusivity, or get bought out via big Pharma. If wars/ flu pandemics/ natural disasters occur then after the emergency stage is over there are more infections in the population due to poor sanitation needing treatment. If recessions occur or costs of care keep rising, Insurances want less people admitted to hospitals and pay up for drugs that prevent hospitalizations. Not correlated much with the indexes and worldwide value potential. Thoughts?

 

Interesting. Reasonable thesis and good play on specific knowledge you have.  In this case you are making the argument for a macro event and placing bets that it may happen. If there is another "great Recession" unrelated to a plague, it's unlikely that this pharm company may get stronger. It might not survive the downturn. R&D may get halted. Due to recession, drugs won't be bought on patent....Thus, whilst the investment thesis may be sound, it wouldn't be part of an "anti fragile portfolio" in my view.

I think biotech, venture capital, etc. are all areas where one could find anti-fragile investments with massive potential pay-offs. That doesn't mean that you are able to identify these investments yourself or that most of them will succeed. 95%+ of those investments will probably be zeros. That's why you don't put your entire portfolio in extremely risky stuff like this, but only a small portion at most.

 

Personally, I think this whole idea of seeking anti-fragility in financial markets should be left to the 140+ IQ folks. I'm not able to make millions or billions the next time the market crashes, like Taleb and Michael Burry did. Most of us should just focus on being "robust" and not blowing up when the shit hits the fan. I think that can be achieved by seeking out companies with strong balance sheets and where investor expectations are already low. Perhaps increase your focus on special situations and workouts as bargains dry up, or else raise cash levels.

[no_free_lunch]

Personally, I think this whole idea of seeking anti-fragility in financial markets should be left to the 140+ IQ folks. I'm not able to make millions or billions the next time the market crashes, like Taleb and Michael Burry did. Most of us should just focus on being "robust" and not blowing up when the shit hits the fan. I think that can be achieved by seeking out companies with strong balance sheets and where investor expectations are already low. Perhaps increase your focus on special situations and workouts as bargains dry up, or else raise cash levels.

 

+1 to that.

 

In the robust category you might include PCLN.  They should be able to capitalize on a slowdown in travel by taking market share from rivals, whethere traditional travel agents or OTA.

[no_free_lunch]

Knight pharmaceuticals

 

Agreed.  Should be able to get better terms on licensing or investments in a downturn.  Pharma in general is fairly resistant to recession.

[Sharad]

I have convinced myself that Altria could in fact be an anti-fragile stock. The free cash flow generated combined with its highly leveraged position provide it with optionality in good times and bad. When the market punishes the stock (as it seems to do every 9-10 years), the company simply uses more of its free cash flows to buy back shares, or pay down debt at significant discount to its face value. When the market rewards the stock with a premium price, it borrows again at attractive rates (for the next rainy day), increases the dividend, or uses its stock as currency for acquisitions. As smoking rates have fallen in the United States, Altria shareholders have continued to see outsized gains on their investment...for more than 50 years, even after the publication of the first studies that showed smoking was harmful, an investment in Altria has averaged around 20%/year. I suppose being forever unloved by half of investors helps them too. Considering the company's performance since the legal settlements in the late 1990's/early 2000's and as smoking rates have collapsed in the United States, I think Altria (as an equity investment) has shown that it can become stronger after periods of deep stress, and they didn't really change that much over that period of time.

 

 

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.

[Guest cherzeca]

In my field of infectious diseases - companies making next generation antibiotics to treat resistant bacteria, like Paratek and Achaogen are interesting- caveat is it should be a zero to one kind of drug, be available to use inpatient and outpatient and the company although small has a fortress like balance sheet w cash on hand. If economies do well, they do well with tailwinds of aging population, increase in drug resistance in a compounding fashion, and the GAIN act for additional 5 years market exclusivity, or get bought out via big Pharma. If wars/ flu pandemics/ natural disasters occur then after the emergency stage is over there are more infections in the population due to poor sanitation needing treatment. If recessions occur or costs of care keep rising, Insurances want less people admitted to hospitals and pay up for drugs that prevent hospitalizations. Not correlated much with the indexes and worldwide value potential. Thoughts?

 

Interesting. Reasonable thesis and good play on specific knowledge you have.  In this case you are making the argument for a macro event and placing bets that it may happen. If there is another "great Recession" unrelated to a plague, it's unlikely that this pharm company may get stronger. It might not survive the downturn. R&D may get halted. Due to recession, drugs won't be bought on patent....Thus, whilst the investment thesis may be sound, it wouldn't be part of an "anti fragile portfolio" in my view.

I think biotech, venture capital, etc. are all areas where one could find anti-fragile investments with massive potential pay-offs. That doesn't mean that you are able to identify these investments yourself or that most of them will succeed. 95%+ of those investments will probably be zeros. That's why you don't put your entire portfolio in extremely risky stuff like this, but only a small portion at most.

 

Personally, I think this whole idea of seeking anti-fragility in financial markets should be left to the 140+ IQ folks. I'm not able to make millions or billions the next time the market crashes, like Taleb and Michael Burry did. Most of us should just focus on being "robust" and not blowing up when the shit hits the fan. I think that can be achieved by seeking out companies with strong balance sheets and where investor expectations are already low. Perhaps increase your focus on special situations and workouts as bargains dry up, or else raise cash levels.

 

the purest definition of a portfolio that is not antifragile is one devoted to investments where 95% are likely zeroes.

 

the discussion about cash is interesting, insofar as stocks that retreat in price may increase in value, and one can only take advantage of this if one has cash to deploy. ah but what happens if the market goes up and as the price rises value decreases? well, a buck is still a buck and it still pays for the groceries.  so if you understand an antifragile portfolio not as being a smart allocation but rather an allocation having characteristics that permit opportunities to be taken advantage without excessive risk (this is the antifragile aspect, the market is stressed but your portfolio permits you to take advantage of the stress), then cash plays an important role.  another way of saying all of this is that an antifragile portfolio permits you to take advantage of opportunities to buy right, and leaps and other option opportunities allow you to buy right while minimizing the cost outlay (understanding that there is no free lunch and you have to pay a premium for the optionality).

[DocSnowball]

What is the best place to park short term to medium term cash part of this anti fragile portfolio?

[NeverLoseMoney]

the purest definition of a portfolio that is not antifragile is one devoted to investments where 95% are likely zeroes.

It could very much be anti-fragile if you have the expertise to pick a few 1000 baggers from time to time. This can't be done without also picking a lot of losers. And again, the portfolio is not devoted to (in the sense of concentrated in) these investments. It would be a tiny sliver of a total portfolio. The overwhelming majority of the portfolio would be in cash or treasuries.

 

I'm amazed there is even any debate about this. Taleb literally talks about this in his books. He made his own money by seeking extreme payoffs with a small portion of his portfolio.

[Cigarbutt]

"What is the best place to park short term to medium term cash part of this anti fragile portfolio?"

 

You just have to find a security that will provide a safe, consistent and high return that will not be influenced by an adverse currency exchange volatility and that is not a Ponzi scheme. :)

 

"I'm amazed there is even any debate about this. Taleb literally talks about this in his books. He made his own money by seeking extreme payoffs with a small portion of his portfolio."

 

Maybe it's not a debate but more variations on a common theme.

 

Historical example: WWII ranked as the most destructive in human history (although debatable, could be considered a black swan). 400 000 Americans died. But the United States emerged from the war stronger than when it began as the Eurocentric international order fell apart and as the nation's GDP doubled between 1941 and 1945. I submit that this would meet one of the definitions of Anti-Fragility.

 

 

[thowed]

Harry Browne's Permanent Portfolio

 

It's not quite right, but it's certainly proved pretty resistant to breaking.  You might want to modify it a bit now e.g. add some TIP$ into the mix with the Gold.

 

I'm not suggesting it's the right investment for anyone, but I have certainly found some very interesting things to consider in his writing.

[thowed]

Separate post for a separate thought.

 

I like the type of companies in KCLarkin's post i.e. those who make (and are able to make) smart acquisitions in down-turns.

 

However, I wonder how much we are all coloured by our bias of the recent past i.e. the fact that things bounced back so fast in 2008, rewarding companies like these.

 

If we were to consider a situation where a future crash then led to the markets not recovering for years and years, e.g. Japan post-late-80s, would we think differently?

 

I wish I had a better historical perspective to provide an answer.  Perhaps it's time to dust off 'Anatomy of a Bear' again...

[investmd]

Separate post for a separate thought.

 

I like the type of companies in KCLarkin's post i.e. those who make (and are able to make) smart acquisitions in down-turns.

 

However, I wonder how much we are all coloured by our bias of the recent past i.e. the fact that things bounced back so fast in 2008, rewarding companies like these.

 

If we were to consider a situation where a future crash then led to the markets not recovering for years and years, e.g. Japan post-late-80s, would we think differently?

 

I wish I had a better historical perspective to provide an answer.  Perhaps it's time to dust off 'Anatomy of a Bear' again...

 

The idea of anti-fragile is something that could withstand something previously unforeseen, the "black swan" event. It will be different next time, but who will be around to take advantage of the opportunities in the next different environment. Who has the DNA and financial wherewithal to survive and be an acquirer...

[ICUMD]

Anti Fragile - sounds a lot like a term coined to sell books.  It it not a synonym for 'Resilience'?

 

I think most value investors always strive at 'resilience'.  I would argue I've been doing that from the time before Taleb even wrote his book!

[John Hjorth]

Anti Fragile - sounds a lot like a term coined to sell books.  It it not a synonym for 'Resilience'?

 

I think most value investors always strive at 'resilience'.  I would argue I've been doing that from the time before Taleb even wrote his book!

 

It's used in this topic as a direct reference to the definition made by Mr. Taleb in his book of the same name, which is covered in the Books forum here.

[RichardGibbons]

Anti Fragile - sounds a lot like a term coined to sell books.  It it not a synonym for 'Resilience'?

 

No. Resilience means "recover quickly from difficulties".  Anti-fragile means "become stronger as a result of difficulties".

[Guest cherzeca]

Anti Fragile - sounds a lot like a term coined to sell books.  It it not a synonym for 'Resilience'?

 

No. Resilience means "recover quickly from difficulties".  Anti-fragile means "become stronger as a result of difficulties".

 

while taleb did address in his book what an antifragile portfolio would look like (barbelled with lots of cash/safe assets and some assets with optionality), it seems to me that how one manages the portfolio can lend more anitfragility to a portfolio than the particular make up of the assets.

 

take for example the practice of taking profits, as opposed to letting winners run.  ex ante, you never know which is the preferred choice.  but it seems to me that taking profits is more antifragile than letting winners run.

[netnet]

Very interesting discussion. 

 

Some are confusing anti-fragility with robustness.

 

Nevertheless, let's look at the model itself, anti-fragility may be generally, highly specific, in biological terms, say like vultures feeding on carcasses as a result of some massive ecological disruption or mammals taking over niches once occupied by dinosaurs.  In business, SD's example of a labor exchange for disrupted workers, is much like the vultures, as are retail liquidators.  As far as occupying niches: early post war Japanese car manufacturers both in Japan and eventually in the US, had enormous niches open to them.  These 'organisms' profited from the disruptions, they were anti-fragile.

 

 

Now to think about the model a minute, really some companies are both.  I would argue that ready cash and great capital allocators go a long way.  (with the ready cash, i.e. liquidity is necessary component of both robustness and anti-fragility.)  BRK arguably was both robust and in Buffett's deployment of cash anti-fragile.  Taleb's barbell's cash component is similarly robust, it's proper deployment is anti-fragile.

 

Note: After all, some of BRK's businesses were hurt by the great recession, would you argue that BRK was stronger during the recession? I wouldn't, except comparatively. It was slightly weaker, but so robust that Buffett could make his anti-fragile investments work, so there is a bit of a timing issue too. My argument here may be a little weak as I will concede that Buffett's reputation, buttressed by cash was or became an anti-fragile asset that companies craved, and that his reputation grew with recession or the value of his reputation grew. (Hence Goldman would be far more likely to give Buffett better terms on his money than say you or me or even David Swenson of Yale endowment, had any of us offered Goldman a few billion!)

 

I would call BRK both robust and anti-fragile, at least as long as Buffett is competently at the helm!  One could argue what the exact spread between the two qualities are, which is perhaps interesting to many (but not to me)

 

 

[ICUMD]

I have to plead a bit of ignorance as I haven't read as of yet any of Taleb's books.  Though I appreciate the clarification between Antifragile and Resilience now.  Personally, as a bit of a philospher I have always tried to distill complex concepts to simpler ones which are easy to understand and apply.  In investing, as in life, a multipronged strategy (like in MMA) works best.

 

The two greatest competitive assets one can have in investing is 1. Cash and 2. Time.  With these you have options, (however, one can trump the other should there be devaluation). They would I suppose, be the core components of an 'Anti-Fragile' strategy.  However, I believe risk is essential - and calculated high risk bets are necessary in life to achieve exceptional outcomes, though these need not compromise base security.