Anti Fragile by Nassim Taleb

Key takeaway to become Anti-Fragile

1) Optionality and non-linearity
When you lift weights, muscles tear and rebuild given time and your body builds up excess capacity so that your body adapts to lift heavier weights next time. In evolutionary biology,  <Tummy fat and glycogen metabolism> is a natural mechanism to build up energy buffers in case the body goes through periods of starvation or requiring sudden bursts of energy usage.

Excess capacity is often frowned upon as it is sub-optimal allocation of resources, until you truly need it. Fund managers pile up leverage that can withstand the worst earthquake that was observed until the next mega-catastrophe that occurs. Companies leverage up excessively to catch the tailwind of the economic boom until the next blowup occurs. Making one anti-fragile involves the willingness to make sub-optimal returns compared to risk taking peers, building warchest and deleveraging, and focus on survival until the unforeseeable occurs.

2) The Streisand Effect
The Streisand Effect is whereby the desire to kill an idea can directly lead to its proliferation. The TianAnMen incident is a prominent example whereby the more a country tries to censors certain information, the more attention the public will focus towards the matter. The rise of VPN and tunneling as well as activists such as Wikileaks made the deliberate censorship of specific matters / scandals through state media more difficult as time goes along. 

The NKF (TT Durai) scandal is probably a prominent one which the excesses of management was reported by sub-contractors and forcibly suppressed by legal means, until NKF sued the SPH for defamation. Although I believe the reasons the scandal was revealed due to Hubris (over confidence by the CEO and picking a fight with someone with deep pockets) rather than social justice, the power of state media and lawsuits is eroded with the proliferation of social media and anonymous reporting.

3) Fragile & Antifragile Jobs
There are certain career paths which despite delivering prestige and pays well, are in fact more fragile compared to the more crass and unloved jobs. White collar middle management jobs in the banking sector are highly subject to public scrutiny and making their career paths fragile. Employees in government jobs although have stable career paths and cash flows, are particularity prone to political correctness and making simple mistakes could be career suicide.

People who don’t seem to care how they dress or look are robust or antifragile. People who have to wear suits and ties and worry about a bad reputation are fragile.

4) Domain Dependence
Charlie Munger's multi-disciplinary approach to approach business and investment problems is an active way to curb the limitations of economic models. Social sciences overplay econometrics to solve mathematical problems yet understate human psychology. Human variables are volatile and subject to swinging from risk aversion to risk takers as seen in the recent market crash. The Philips curve is a prominent example whereby people mistake causation with correlation, believing hiking interest rates will solve inflation due to traditional correlations, and min-max it until it doesn't work.

Small stresses on your income can be good for keeping you from accumulating silent risk or becoming cocky. Small fights in your relationship can help it become stronger, and avoid big fights. Doubts on the chinks on readily available information and valuation models keeps one honest, to be willing to re-assess the facts / assumptions as the world evolves.

5) The Procrustean Bed (Over-fitting fallacy) and turkey problem (what has occurred will go on forever)

The model is the map and interpretation of the world we live in. DO NOT over-fit the world to your model and ignore market reality. The CAPM, small cap premium, risk parity arbitrage, merger arbitrage and other exotic strategies has seen their day of success in the past, which has not aged well in the recent market crash.

Even successful value investors (reasonable PE compared to fundamentals, business resilient to changes) will under-perform periodically in market conditions compared to the antithesis (High PE, tech stocks) and there is no way to ascertain if this will carry on to the future. Investing is a convoluted game whereby past performance DO NOT guarantee future success. A sound investing methodology involves being rational, but also involves having faith that the strategy will work given enough time.

But no one in this world can guarantee it will continue to work.

6) Applying stoicism to success
Success can make you fragile, because you now have much more to lose than you did before. You’re afraid of becoming poor. When you have invested one thousand dollars in the stock market, all you can lose is a thousand. If you build a Forbes 500 conglomerate based on investing prowess with a strong track record of success, the fear of breaking the track record and disappointing your investors could be enormous. To cope with the pressure, the stoic technique of “practicing poverty” helps reduce your fragility from being afraid of losing your wealth.

The “Oracle of Omaha” tailors his breakfast order according to how the market is doing that day, according to the HBO documentary “Becoming Warren Buffett.” If the market's down, Buffett opts for the $2.95 sausage McMuffin instead of the $3.17 bacon egg and cheese biscuit.

7) Creating stress factors to keep one sharp

Prosperity renders the affluent weak. The absence of challenge and competition degrades the capabilities of a person.

Writing in cafes with distracting background conversations helps you focus.

Children struggling to learn a language to make his needs known to their parents forced them to be fast adopters.

A smaller company with less resources is more focused on survival and more determined to create products that directly addresses customer niches / needs compared to larger bureaucracies (with long chains of commands and approvals)


8) Naive Intervention
The mistaken desire to intervene, particularly from doctors, that can lead to “iatrogenics,” which means “harm caused by the healer. Well intention-ed actions by the ignorant could aggravate the situation.

Two of the most memorable quotes I heard on value investing is this.

(If you have chosen wisely in the first place, you will not have to worry too much on selling. )

(We are very good at doing nothing. In fact, we are getting better as the years goes along).

My biggest mistake is my Apple position whereby I took profits too early instead of recognizing the two-bagger (or more) potential. My initial entry into Apple is simply a cheap stock that is too severely battered and it has demonstrated stickiness on its users though its software apps, as well as branding familiarity. I sold the stock because it has appreciated a mere 10%, based on the thesis it has little potential growth as a mega-cap, increased competition from the china smartphones, and the development of technology made IOS to android migration more susceptible.

I failed to recognize the human tendency to resist change and stick to the successful and familiar IOS, and lollapalooza effects in Apple's marketing campaign, distribution networks, social status and approval as well as the general lower tech saviness of the Iphone audience.  Owning an i-phone is more similar to owning a Louis Voulton bag and Coca Cola than high tech gadgetry. Building a reputation based on perception about product prestige and quality, availability, customer focus, positive experiences, and creating tacit but reinforcing social approval leads to a sizable moat in the fast moving technology space.

9) Barbell (Primodal) Strategy
The barbell demonstrates an “antifragile balance,” the idea of two extremes kept separate, with avoidance in the middle.

If your job is sales orientated, volatile with erratic cash flows, your portfolio may allocate more resources to unlevered dividend stocks / treasury bonds with stable cash payouts to fund your lifestyle. If you can take a safe day job (with stable income but limited upside), a stock orientated portfolio may capture more upside.

10) The Lindy effect
For the perishable (food, humans), every additional day in its life means it is closer to dying. For the nonperishable (books, ideas), every additional day of its life can imply a longer life expectancy. If a book has been in print for 100 years, it will likely continue to be read for another 100. Just because something is more recent and available do-sent make it more valuable. 

People obsess over the latest technology items. But for classical art, literature, works that have endured, older tends to be better. You likely replace your phone every 2 years, but not the painting on your wall.

Stock tips and brokerage advise that are aggressively marketed is necessarily inferior, otherwise it would not need to be aggressively marketed. Marketing beyond conveying information is insecurity.

The pursuit of meaning within Big Data has brought about many more spurious and random relationships than meaningful understanding. The false relationships will grow much faster than the real one, simply because technology allows so many more of them to be found.

The human brain is particularly prone to the recency bias (what is most recent and most available seems more real) as well as the confirmation bias (what you wish to be true, you will seek out opinions that reassure you that you are right)

11) Obvious decisions (robust to errors) require no more than one good reason.
If you have more than one reason to do something, don’t do it. By invoking more than one reason to do something, you are trying to convince yourself to do it. A simple and understandable thesis to invest in a stock is more robust compared to extensive weeks of research and copious assumptions.

Conclusion
Food would not be pleasurable if not for hunger. Results are meaningless without effort. Joy without sadness makes a stale relationship. Convictions without uncertainty is equivalent to having blind faith. Corporate governance and management integrity is baloney if directors, management and employees are stripped of personal risks and not having skin in the game.

These are wise words to live by.