Nassim Taleb is one of the greatest investors, businessmen and thinkers of our time. As the founder and former hedge fund manager at Emperica Capital, Taleb was reported to have forecast an incredible 60% return in predicting the market bubble of the year 2000, as well as single-digit gains in 2003 and 2004. Today, Taleb is scientific advisor to Universe Investments LP, an investment management firm that specializes in risk mitigation. This fund has given an average annual return of 10.4%, but with wildly different payouts each year. For example, once Universo achieved an astronomical 3,700% return on invested capital in one month, according to data from Bloomberg Terminal.
Taleb is the author of several well-known books such as Antifragile: Things That Gone From Disorder and “The Black Swan.” He is known for predicting Black Swan events, which are rare events at the end of a normal distribution curve. A prime example is the 2008 financial crisis. Antifragile is a complex concept that refers to a phenomenon in which something strong can break through impact, as opposed to something fragile, meaning that it breaks upon impact. Taleb gives examples of airlines, restaurants and Silicon Valley in his book.
In this article, I will provide an overview of a recent interview with Taleb, in which he shared his thoughts on the stock market and the economy, as well as my own commentary. The original Jan. 31 interview was conducted by Sonali Basak of Bloomberg at an investor day in Miami.
Finance 101 and ‘tumors’
Naseem begins the discussion with a level set on Finance 101, “in which he explains that happiness equals positive cash flow.” But in 2008 Taleb acknowledged that this notion had disappeared. He said this was due to the Federal Reserve slashing interest rates to zero to stimulate the economy. It worked, but it was supposed to be a temporary measure and thus caused other problems if left in place. Taleb likes to call these conditions tumors, meaning something harmful that grows uncontrollably. They believe it created over $100 trillion in illusory assets.
Great examples of tumults, “which I guess could also be called bubbles or asset-based inflation, include crypto and real estate (pre-2008).” I’ll add that I also think that SPAC (Special Purpose Acquisition Company) stocks’ 2020 growth was a tumor. A more anecdotal example of billionaires cited in many lists of top billionaires. Taleb points out that many of these billionaires get rich from valuations, not actual cash flows. They believe that it is just ostentatious wealth and it also helps in promoting inequality.
A great example of this I can see is Tesla CEO Elon Musk (NASDAQ:TSLA), who became the world’s richest man in 2020 based on the sky-high valuation of Tesla stock, which at one point hit a $1 trillion market cap. crossed over. At the time, Musk also tweeted that the stock was overpriced, and has since been reduced to a ~$500 billion valuation, showing how dependent Tesla stock is on Musk’s wealth. Taleb said Musk’s acquisition of Twitter for $49 billion may have taught him about cash flow.
Is the stock market still overvalued?
The stock market hit a big bubble in 2020, which many believe was caused by a rising interest rate environment that resulted in a contraction in the multiples of many growth stocks. The Nasdaq ETF (NASDAQ: QQQ) is down 24% from its all-time high and the S&P 500 is down 21% from its high before reversing somewhat. Despite this selloff, Taleb believes the stock market is still overvalued for interest rates of 3% or 4% versus the 10-year Treasury bond rate. He suspects that the stock market is valued as if interest rates were closer to 1%.
Nassim Taleb: There is a ‘tumor’ in the stock market
The positive is that inflation is on a downward trend, with 6.5% reported in December, down from a June 2022 high of 9.1%. Future.
Nassim Taleb: There is a ‘tumor’ in the stock market
Is bitcoin a good investment?
Taleb was initially a fan of bitcoin because it was not fed by the Fed and therefore potentially a useful alternative currency. However, once he studied it deeply, he wrote a paper called the Bitcoin Black Paper.
In that paper, he explained that bitcoin was not a hedge against inflation, “as previously believed, due to its limited supply. This was because when there is high inflation, it causes the Fed to raise rates.” , which in turn hurts asset valuations.
He also believes that the fact that bitcoin is seen as a positive because of its decentralization can also be a negative. This is because a flaw in the system could create a ripple effect, which Taleb predicted could lead to bitcoin zero.” However, this would be classified as a black swan event, which would be very rare.
long term investment strategy
Taleb doesn’t like using one year as a time period to measure investment performance. In my mind, this makes complete sense because I’ve often thought that a company, stock, or other investment doesn’t know when a year ends. Taleb prefers to measure returns based on a five-year, 10-year or 15-year plan.
The goal is to protect investors from tail risk while ensuring an asymmetric payoff. Taleb aims to insure customers against adverse events. To do this he uses advanced algorithms and options trading to make big payoffs during Black Swan events.
changing world
Taleb believes that thanks to globalization, prices adjust much faster than before. A prime example is oil, which turned negative in 2020 before skyrocketing to over $100 a barrel. Taleb also compares the Russia-Ukraine oil/gas crisis to the oil embargo of the 1970s but with major differences. In the recent past, Russia aimed to strangle Germany through restriction of gas supplies, but it only took nine months for gas supplies to recover. Whereas in the 1970s it took several years.
Taleb estimates that prices will still fall.” He is also skeptical of how inflation is measured because it depends on what you buy. In a simplified manner, Taleb projects housing and Wood anticipates both.
Nassim Taleb: There is a ‘tumor’ in the stock market
risk of debt
The US government recently approached its $31.4 trillion debt limit, and many companies are at even higher levels. This is a risk for organizations as it means that the cost of repaying the loan will go up.
Taleb explains that in the olden days, if a company could not repay its debt, it would go bankrupt, which is a common practice. However, this has not happened so far for many companies and thus can be a painful prospect for many businesses.
I believe a quote by Warren Buffett (Trades, Portfolio) sums up this scenario perfectly: When the tide goes out, you see who’s swimming naked. The tide (of easy loans) goes out.
One positive for the US is that it is still considered the safest place to invest with one of the highest credit ratings. Taleb believes the situation will be much worse in other countries such as Egypt, Europe and even Japan.
final thoughts
Nassim Taleb is one of my favorite figures in the financial world. His unique thought process and strategy is actually quite the opposite in nature. Taleb isn’t afraid to bet against the consensus and has strong opinions that lay out the problems with modern finance. His style teaches us to think independently while investing, keep a long time horizon and hedge our portfolio against black swan events.
This article was first published on GuruFocus.
Source: finance.yahoo.com
