Excellent! See the entire list, link below.<\/p>\n
\nA Dozen Things I\u2019ve Learned from Nassim Taleb about Optionality\/Investing<\/p>\n
1. \u201dOptionality is the property of asymmetric upside (preferably unlimited) with correspondingly limited downside (preferably tiny).\u201d<\/strong>\u00a0 Venture capital, when practiced properly by a top tier firm, is a classic example of a business that benefits from optionality. All you can lose financially in venture capital is what you invest and your upside can be more than 1000X of what you invested.\u00a0 Another example of optionality is cash held by a disciplined patient value investor with the temperament to not buy until Mr. Market is fearful.\u00a0 As just one example, Warren Buffett did exactly this during the recent financial panic and earned $10 Billion by putting his cash to work.\u00a0 Seth Klarman, Howard Marks and other value investors use dry powder in the form of cash to harvest optionality since Mr. Market is bi-polar.<\/p>\n
2. \u201d\u2018Long volatility\u2019 in trader parlance, has positive optionality.\u201d<\/strong> As an example, the optionality of cash allows the holder to buy assets from people who were \u201cshort volatility\u201d when a crisis hits. The wise value investor sits and waits patiently for Mr. Market to deliver a fearful market and when the intrinsic value of a company\u2019s shares presents a \u201cmargin of safety\u201d buys in quantity.<\/p>\n
3. \u201cIf you \u2018have optionality,\u2019 you don\u2019t have much need for what is commonly called intelligence, knowledge, insight, skills, and these complicated things that take place in our brain cells. For you don\u2019t have to be right that often. All you need is the wisdom to not do unintelligent things to hurt yourself (some acts of omission) and recognize favorable outcomes when they occur. (The key is that your assessment doesn\u2019t need to be made beforehand, only after the outcome.)\u201d\u00a0<\/strong> Being able to make decisions which do not require correctly forecasting the future is a wonderful thing.\u00a0 Not one of the great value investors identified in the series of posts in this blog relies on macro forecasts of the future.\u00a0 Instead, value investors use the optionality of cash to buy after the outcome exists (i.e., a significant drop in intrinsic value). Regarding venture capital, Warren Buffett believes:\u00a0 \u201cIf significant risk exists in a single transaction, overall risk should be reduced by making that purchase one of many mutually- independent commitments.\u00a0 Thus, you may consciously purchase a risky investment \u2013 one that indeed has a significant possibility of causing loss or injury \u2013 if you believe that your gain, weighted\u00a0 for probabilities, considerably exceeds your loss, comparably weighted, and if you can commit to a number of similar, but\u00a0 unrelated opportunities.\u00a0 Most venture capitalists employ this strategy.\u201d<\/p>\n<\/blockquote>\n