Why is Taleb so popular now? Perhaps you have heard of the Sub-prime debacle? Nassim called it. Whatever unexpected that happens you'll find that most of the experts didn't expected it--just as Taleb predicted. Space Shuttle? Berlin Wall? Britney's meltdown? Again, these thing were big events, and most experts didn't expect them, so Taleb did. Well, actually all he said was that unexpected things happen a lot. Is that a correct call? If you believe so, you are a Taleb fan.
The article starts by noting that Taleb was lecturing to a group of Morgan Stanley risk managers, lambasting 'stress tests'. This is strange because one would think that, to a guy that hates the normal distribution, or really any parametric distribution, he would love the stress test. Stress tests can be anything you want: what happens to your portfolio if the S&P goes up 10% and the dollar falls 10%? Improbable, perhaps, but these are nonparametric, their scope is only limited by your imagination. That he would say these are bad, leaves one to wonder, what, exactly, he thinks risk management should focus on. But that is not Taleb's oeuvre, which is merely to criticize any forecasting tool because it is imperfect. The only positive advice he gives, is trivial, things like, go to cocktail parties, because you might hear a good idea in such a nontraditional environment; or that you should invest in wacky investments that have Powerball-type upside. Good luck with that.
Success is mainly marketing, and you have to hand it to Taleb, he's slyly presents himself as a prescient speculator, someone who makes money taking positions, without ever really saying so. For instance, it is remarked in the story he 'made' $35MM on eurodollar options on Oct 19, 1987 (the market crash). As a trader, that just means he didn't have his risk hedged, because remember, we was primarily a market maker then, a guy who makes money off customer flow, and so generally you don't want these guys taking sides, they make money off the bid-ask spread. And so the 200 point move in Eurodollars that day (unprecedented) exposed him. That's simply a mistake, and others who didn't hedge their risk probably had the opposite pnl. But, elsewhere, if I remember, Taleb admits that his Oct 19th fortune was luck. Nevertheless, by putting out he 'made' $35MM, and that traders called him 'Nassim the dream', clearly it suggests he has the Midas touch. Subtle.
And then there's his hedge fund, Empirica Kurtosis, a fund he ran for 5 years, from 2000 through 2004. There was a joke when I was at one fund, where a bad idiosyncratic trade is always called a 'hedge' after the fact. That is, the money you lost on that punt on volatility, or the oil bet you made that goes against you, you say was hedging something else in your portfolio. It's a nice way to explain away a bad idea. So after the fund starting grinding out losses, Nassim started calling his fund a 'hedge', not a fund, later, a 'laboratory'. Now he says about the fund:
`Our aim was not to make money,'' Taleb says. ``I make no claims of being able to beat markets.'
But he makes sure any article that mentions his fund notes he made 60% in 2000. The only record of his total fund was a WSJ article on him in 2007, which notes he lost money in 2001 and 2002, made single digits in 2003 and 2004. That averages out to around 12%, and as the risk free rate was about 4% over that period, and the volatility was probably around 17% on a monthly basis, thats a Sharpe of 0.47. Not so good. And that's with his unaudited returns, so it's probably biased high (people have a tendency to round unaudited results upward significantly).
Like almost everything he writes, he is inconsistent, which makes taking him seriously pointless, because he can say that he said anything: his fund was a hedge, it made a ton of money; he was a lucky trader, he was a skilled speculator. I'm clearly a minority in my assessment of his insight, but then again, I didn't like Confessions of an Economic Hit Man or Nickel and Dimed either. Basically, my favorite books tend to be #347 in their category.
The story mentions his former assistants are starting funds based on capturing the Black Swan, a fantastic plan. If you write a best selling book about investing, clearly some of those readers will be rich hedge fund investors. Now pitch them with the following story that is totally consistent with your revolutionary insights: I get 2 and 20 fees. Your returns will be near zero, until we catch a financial Black Swan, whose return cannot be quantified, but think Google or Harry Potter. Of course, 'absence of evidence' is not 'evidence of absence', so if nothing happens after 10 years, that proves nothing. Heck, even a lifetime of zero alpha proves nothing. Meanwhile, on $1B, that's $20MM per year. Brilliant!