How to gauge your financial fragility or vulnerability and how to be the opposite of fragile.
In this episode, you’ll learn:
- What is an option.
- What is the VIX volatility index.
- What does it mean to be fragile and antifragile.
- What is the difference between being long volatility and short volatility.
- How conifers are antifragile.
- How to tell if you are fragile or antifragile.
- What is the difference between black swan events and grey swans.
Show Notes
MNY023: Smart Beta – What Is It and Should You Use It
Antifragile: Things That Gain From Disorder by Nassim Nicholas Taleb
Henry David Thoreau’s journals
The Dao of Capital: Austrian Investing In A Distorted World by Mark Spitznagel
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Summary Article
Are You Fragile or Antifragile
After high school, I worked as a dishwasher at a hotel restaurant. This was an upscale place with fine china and crystal glasses.
When the restaurant got busy, servers would bring in tray after tray loaded with dishes.
I’d scurry around the counter and separate the plates from the silverware and put the glasses in large cup racks on the shelf above my head. When a cup rack was full I would load it into the automatic dishwasher.
To stay ahead of this onslaught of dishes I had to move quickly. Unfortunately, some of the dishes were not designed for speed.
During my first few weeks I broke a number of the champagne glasses with their narrow necks and delicate sides as I shoved them in the cup racks.
Champagne glasses do not like sudden movements. They detest volatility and prefer stability. They are fragile.
How Conifers Are Antifragile
Conifer trees are the opposite of fragile. They are what Nassim Nicholas Taleb calls “antifragile” in his book by the same name.
Henry David Thoreau marveled as he wandered the Massachusetts countryside why conifers grew abundantly in some areas while oaks and maples dominated other terrain.
He speculated that conifers grew in sandy soil that had previously been cultivated by Native Americans who would burn the land to clear it.
He was correct. Conifers can grow anywhere but they cede the most productive land to angiosperms and instead take hold on rocky ground, steep cliffs and other less fertile outposts.
Then when the deciduous trees and grasses overproduce and wildfires sweep through to consume the ripe forest, the conifers’ windblown seeds and resin-coated cones, stimulated by the fire, germinate in the newly cleared soil.
Mark Spitznagel in his book “The Dao of Capital: Austrian Investing In A Distorted World” writes of the conifer, “Through its adaptive strategy that has allowed it to survive over hundreds of millions of years, the patient and persistent conifer teaches us that it is far better to avoid direct, head-on competition for scarce resources, instead to pursue a roundabout path toward an intermediate step that leads to its eventual position of advantage.”
Conifers thrive on volatility and extreme events. They are the opposite of fragile.
Something is fragile if the harm it suffers accelerates as adversity increases. The harder I shoved the champagne glass into the rack the more pieces of broken glass I had to clean up.
In other words, the downside is much greater than the upside.
Financial Fragility and Antifragility
Individuals can be both fragile and antifragile in their financial lives.
Think of the impact on your lifestyle if your income was either cut or grew by twenty percent. What about by fifty percent?
A fifty percent raise would be nice, but a fifty percent drop in income might lead to bankruptcy for many individuals with low savings and high debt levels. These individuals are financially fragile.
Individuals can become the opposite of fragile by reducing their exposure to extreme events such as a decline in income or a market sell-off.
They can do this through buffers, redundancies and hedges, such as savings, insurance, living well below ones means, and having no debt.
When we reduce our exposure to the potential downside, we experience positive asymmetry in that we benefit from good surprises but are not harmed by the bad.
Those who are antifragile don’t have to worry about predicting what is going to happen and when.
They can sleep peacefully at night knowing they have done all they could to prepare, and they have the flexibility to adapt to whatever may transpire in the future.
