Joseph Conrad, Heart of Darkness
"What Taleb is basically saying is that a system or investment that is designed to accommodate infrequent but outsized and somewhat unpredictable risks performs one way he calls anti-fragile. And other systems and investments are designed so that they perform well under 'normal conditions' but tend to underperform, and often badly, during the unexpected.
If you want to grossly oversimplify this principle, and remember it as a saying, pick the right tool for the right job, and remember that nothing comes for free. I used this in describing tradeoffs in very complex products and networks, and while it may sound tritely obvious, it worked with a lot of upper level executives. (some of whom tended toward the trite and obvious lol)
But what is the job itself? Well, the application defines it of course. But one must also take performance criteria into account, and with performance there are environmental conditions and variabilities. Would you like to have a network that can function for your casual use in your home, or a high performance network that can survive arctic cold and desert heat?
But you don't want to waste money and over engineer something either. That is a good way to go broke. One needs to understand expected performance, and the risk profiles for just about anything that is not merely incidental.
And if there is anything that I wish you to remember from this blog, after all these years, it is the deadly trap of undisclosed risks and the tendency of some to understate those risks for their own short term advantages. And how other people will go along with them for the sake of position, power, and prestige. In a nutshell, this is the story of our recent financial crises.
There was a movement in finance to force normal distributions onto data that did not really justify it. In order to achieve this, the risk models made certain assumptions, and thereby 'flattened' reality in order to fit the model. What one ended up with was a mis-estimation (too frequently willful and self-serving) of the risk probabilities. And so we saw 'once in a hundred year events' happening with alarming frequency, despite the best efforts of the financial planners to smooth them over with piles of bailout money...
And sad to say, for most people, their major task is just getting by day to day. And so the pros and cons of various investment techniques is so much hoohah because their most ambitious aspiration is to stay out of debt, especially usurious and fee laden debts, while putting a little bit aside. And this is why I spend quite a bit of time writing about these abuses, because I am not only a caterer to the elite, but to our little community which has a range of wonderful souls in it."
Jesse, Investment and Insurance: Prospective Risk and Return in Various Precious Metal Investments, 7 February 2014
You could just boil it all down to 'hope for the best but prepare for the worst.' But that tends to squeeze out the notion of differentiation.
I suspect forward earnings are going to be a bit grim, no matter what else may happen in our financial Disneyland, and what fabulous tales that some might pour forth.
But we will still get soaring rallies on some transient piece of data, and some altered perception of what the Fed may or may not be doing to promote or sustain another financial bubble.
So we can expect volatility and much of it may not make sense, but against a fairly mediocre background.
Wash-rinse-repeat, instead of the fairly steady upward drift of a bull bubble market.
Unfortunately, we are in the aftermath of another financial asset bubble, again. Third time since 2000.
At their heart, financial asset bubbles are Ponzi schemes, and spawn a number of related Ponzi schemes as well.
Call it a culture of the willful corruption of judgement for personal gain, if you will.
It shapes systems. It bends the rule of law. It grows from a cottage industry to becomes a major export.
Stocks traded weakly again today.
Gold and silver rallied hard early on, but then fell back during the daily grind, but still managed to hold on to some of their gains.
Gold is stuck in an obvious range, and it could be a potential bear flag. It depends on how it breaks.
No one of us can really predict it with any certainty, but we can calculate how to tell what is happening and what our reaction ought to be to it.
But there will be plenty of predictions, and the misses will be quickly forgotten, and the wins, as few as they may be, will be carved in marble.
Or we can just throw down and gamble. And there is a place for that, albeit a measured one, if you want to stay in the nicer neighborhoods.
Most people lie to themselves, which is a complicating factor.
This will be a quiet week.
January could be quite telling for 2023.
Have a pleasant evening.
