≈ Grandma is always right. ≈
“Don’t put all your eggs in one basket.”
Grandma
Yeah, she is right, as usual. What she forgot to tell us, though, is that there are literally hundreds of approaches to accomplish that same goal. Let’s take three successful investors and analyze, from a high-level standpoint, what are their pragmatic approaches to the eggs/basket enigma.
Warren Buffett preaches concentration, however, if you grab Berkshire’s SEC filings you will come to the conclusion that there’s more diversification there than in most portfolios you will ever encounter down the road. He seems to be heavily concentrated on business that he perfectly understand, and that’s quite a diversification.
“If you know that you are vulnerable to prediction errors, and accept that most ‘risk measures’ are flawed, then your strategy is to be as hyper-conservative and hyper-aggressive as you can be instead of being mildly aggressive or conservative.”. Taleb’s Barbell Strategy is utterly simple: nothing in the middle, like a barbell. On one end, hyper-conservative assets; on the other, the hyper-aggressive ones.
With the Paradox of Higher Returns with Lower Risk, Mark Spitznagel puts dynamic hedging in the spotlight. The Tail Hedge system he developed based on his studies in the Austrian School and market interventions by Central Banks, allows his clients to be hyper-aggressive by protecting their portfolios from fat-tail events. This provides room for a much substantial allocation on high-risk assets.
Financial markets are a sterilized environment, apparently leaving no room for conventional wisdom, like those of our ancestors. It never occurred to me that following grandma’s advice would signify thinking outside the box.
Chart of the Day
Barbell Strategy
“If you know that you are vulnerable to prediction errors, and accept that most ‘risk measures’ are flawed, then your strategy is to be as hyper-conservative and hyper-aggressive as you can be instead of being mildly
aggressive or conservative.”
— Nassim Taleb —
Video of the day
Mark Spitznagel on the Paradox of Higher Returns with Lower Risk
Mark Spitznagel discusses the paradox of higher returns with lower risk.
Today’s line up
Rookie Corner
The Breakthrough Part II
So last week we talked about how the pros put themselves in the best position to be successful by reducing risk at every possible turn and making it their sole mission to do so. Did this make sense? Did this concept occur to you as a newer trader? It seems so simple but in practice, it can be harder than one can believe.
Traders Lounge 11PM EST
Join the coaches in this live lounge, ask questions, discuss ideas or just sit back and listen to veteran traders discuss market conditions.
Cashflow Club 8:30PM EST
Held every Thursday before Friday’s option contract expirations, this show helps you perfect your favorite cashflow strategies.
Halftime Report 12:30PM EST
The Halftime Report starts at 12:30 EST and covers what news is driving the market, chart analysis from the movers and shakers of the day and fun in a way that only Matt and Tim can deliver.
Market Recap
The Market Recap is designed to give you a quick overview of the day that was. While brief, this report is designed to cover all of the major events that drove the markets that day and help you plan for the trading day ahead.
Financial freedom is a journey
The Tackle Today series is brought to you by Tackle Trading.
Sign up now and gain unfettered access to all of the quality content and powerful Scouting Reports that our Pro Members enjoy for 15-days absolutely free with no strings attached and let us show you what your trading has been missing.
# Sign up now for a 15-DAY FREE TRIAL #
Legal Disclaimer
Tackle Trading LLC (“Tackle Trading”) is providing this website and any related materials, including newsletters, blog posts, videos, social media postings and any other communications (collectively, the “Materials”) on an “as-is” basis. This means that although Tackle Trading strives to make the information accurate, thorough and current, neither Tackle Trading nor the author(s) of the Materials or the moderators guarantee or warrant the Materials or accept liability for any damage, loss or expense arising from the use of the Materials, whether based in tort, contract, or otherwise. Tackle Trading is providing the Materials for educational purposes only. We are not providing legal, accounting, or financial advisory services, and this is not a solicitation or recommendation to buy or sell any stocks, options, or other financial instruments or investments. Examples that address specific assets, stocks, options or other financial instrument transactions are for illustrative purposes only and are not intended to represent specific trades or transactions that we have conducted. In fact, for the purpose of illustration, we may use examples that are different from or contrary to transactions we have conducted or positions we hold. Furthermore, this website and any information or training herein are not intended as a solicitation for any future relationship, business or otherwise, between the users and the moderators. No express or implied warranties are being made with respect to these services and products. By using the Materials, each user agrees to indemnify and hold Tackle Trading harmless from all losses, expenses and costs, including reasonable attorneys’ fees, arising out of or resulting from user’s use of the Materials. In no event shall Tackle Trading or the author(s) or moderators be liable for any direct, special, consequential or incidental damages arising out of or related to the Materials. If this limitation on damages is not enforceable in some states, the total amount of Tackle Trading’s liability to the user or others shall not exceed the amount paid by the user for such Materials.
All investing and trading in the securities market involves a high degree of risk. Any decisions to place trades in the financial markets, including trading in stocks, options or other financial instruments, is a personal decision that should only be made after conducting thorough independent research, including a personal risk and financial assessment, and prior consultation with the user’s investment, legal, tax and accounting advisers, to determine whether such trading or investment is appropriate for that user.
2 Replies to “Tackle Today: Tales of Diversification 📖”
How do I set up Mark Spitznagel’s method? Can you do a video tutorial on how to set up his Tail Hedge method in TOS? I also read more about his method and he used an example with 97% SPY ETF and 3% S&P 500 Futures put options. He says, “just spend a fixed amount of capital each month on way-out-of-the-money four-month puts on S&P 500 Futures (with straightforward constraint to avoid the priciest options) and mechanically “delta-hedge them; the puts are kept until expiration or sold if they explode to a ridiculously high level. Pretty basic stuff, really.”
Hi, Ellen.
Did you read his book The Dao of Capital? Before we go into the details on *how* to do it, I think we must base our decisions on the theory. It’s a dense book that represents a 180º shift in our mindset—it seems to me. I strongly recommend you read it. His concept of approaching the markets via the roundabouts is very interesting.
I didn’t get to the practical part of it yet, but I am sure he does not reveal his system in its entirety. He reveals some backtesting examples, as far as I can remember. That is his inteclectual property so I guess it would be hard to figure out how he does in every detail.
Jesse Felder, in his 2016 article (https://thefelderreport.com/2016/08/15/worried-about-a-stock-market-crash-heres-how-you-can-tail-hedge-your-portfolio/), tried to dissect the strategy. Nice reading.
Comments are closed.