To shake up my thinking and expose myself to highly-believable people, I attended the two-day program at Nassim Taleb’s – Real World Risk Institute.
You can find my daily notes here. Cleaned up digital version of my notes here.
What follows is my thinking on wealth inspired by what was presented. Mistakes are my own. I can hear things differently than what was actually spoken, so don’t assume my attributions are strictly accurate.
To prepare for the clinic, I re-read the Incerto and I’m glad I did it. Each pass through Taleb’s work provides additional insight. You can find his lectures and lessons on YouTube => well worth your time!
We live in a world where a single bad decision can have massive costs => a few thousand dollars and four days of my time is a small price to (try to) think better.
One of the aspects of my job is guiding the transition of wealth between generations. This sounds sophisticated but it’s a role played by elders and parents in every family system.
My personal greed makes me too focused on financial wealth. It takes effort to step back to see wealth as including:
- The ability to say “no” to others
- The ability to keep promises to myself
- Control of my schedule
- Health, athletic functionality and contentment within my body
- Love and companionship – the ability to share experiences
- Engagement via teaching (my kids, my students, anyone who’s open to implementing what I’ve learned)
What I’m shooting for is creating a strategy, so effective, so straightforward, that an idiot could execute it and preserve wealth access generations.
This is what Taleb calls “Zero Intelligence Investing” but we are focusing on a broad definition of family wealth, across generations, through time.
The impossibility of prediction
Joe did an excellent job of demonstrating how complex systems (even those built on very simple rules, defined by the observer) can be impossible to predict. More specifically, certain systems can only be understood, defined, by running them forward in time. He laid out a host of reasons, any one of which could prove the folly of prediction.
Consider your own life. Cut your age in half, how would you have defined wealth at that age? In my case (25 years ago) the list might have looked like:
- Wine, women and song
- A ton of work that pays well
- Watching my personal balance sheet grow
- Being very strong in the gym
- Travel to new places
There was no way to predict my values (today) without living through the 25 years from then to now (the divorces, the insolvencies, the setbacks, the pain of toddlers, the post-traumatic growth).
Because of the role of time in life, we can not predict the future.
However, we can have useful ideas about what not to do. We can get a handle on what might ruin our families.
So if my goal is to preserve, ideally grow, the collective wealth of my family system what can I do.
- Be vigilant about ruin (in fat tailed environments)
- Spot, discuss and remove fragilities
- Position the family to benefit from positive optionality
One of the things Taleb does best is consider his best ideas across domains, gain insight then translate his insight to the reader via real-world examples. It is the secret sauce of his success.
BUT, reading great ideas doesn’t improve my life! I need to go the next step and tinker with a limited number of outstanding ideas.
Who gets the benefit of your best ideas?
Taleb’s best ideas…
Ruin via the fat tail hitting my fragilities => fancy way of saying don’t blow yourself up! I’ve written about this a lot: Taleb’s written about Russian Roulette => his 1,000,000 chamber gun story in Fooled by Randomness changed the direction of my life.
In the seminar we talked about the non-zero risk of a “zero-risk first cigarette.” Why does a (near) zero-risk choice have a non-zero risk in our lives?
“In life, you must assume that you’re going to take the risk again, and again, and again.”
This completely changes the calculation with regard to the “first” taste of risks that might ruin you: alcohol, rage, opiates, cocaine, sleeping pills, infidelity, felonies, roulette, recourse leverage, luxury spending, unnecessary capital projects… things with the potential for large and unpredictable downsides. Bad habits are always trying to seep into my life!
So, to preserve wealth, you need a process to remove your fragilities, because these are what’s going to ruin you. My family history has persistent, recurring fragilities that hit us hard.
The first step is to gain control of your schedule and create space so that you’re able to think more clearly about what can ruin you. Simplify.
Another great insight – life is not about avoiding risk…
“Take chances, lots of them, and focus on areas where volatility works for you.”
In an uncertain world, one of the best sources of optionality is non-recourse finance.
My first career (Private Equity) could be described as getting overpaid to hold a call option over other people’s work, using other people’s money, without recourse.
Negative action is powerful medicine, with low side effects.
It’s tempting to ask Taleb “what to do.” I did, twice, and he didn’t seem keen on advising positive action with regard to an unknowable future. That’s probably good, as I’m not equipped to implement, or even understand, his technical advice. However, his negative advice (on what to remove) generated huge wealth for me => my total cost was the price of buying Fooled by Randomness on Amazon ($10.17 in December 2005 – my Christmas 2005 reading list, you can skip the flat earth book, the rest were great).
There are many sources of optionality:
- where I have limited competition
- where I understand the domain as well as anyone
- where the cost to enter is small
A few ideas:
Get married, have kids, then take excellent care of everyone (!) => dementia is in my family tree => doing well by my family is the “cost” of a call option for times of future stress => an option that has a constant payoff in companionship, personal growth and a semi-captive audience for teaching.
Technical education in a robust field => look back in time for Lindy professions => spend time and effort for continuous education
But be careful, the “honors” part of my college education (1st class honors Econ/Fin) proved to be technically useless. However, it helped get me a seat at the table in Private Equity. The overall degree taught me valuable skills with regard to financial accounting, programming, mathematical finance and calculus.
Knowing how to count, and being exposed to the way people seek to cheat you, these are useful life skills to prevent ruin. – quote mine
Other sources of optionality => tinker within your social network, attend conferences (and force your introverted self to speak to people), write (then publish), talk to believable people that disagree with you, donate time to people who might benefit from your technical skills (especially within your local community)…
Your body can be a call option on: future mates, future physical experiences, the ability to lift your carry-on overhead as you age…
So the “how do I stay wealthy” answer is about removing fragilities => cutting back a high cost of living, habits with large potential downsides, physical weakness…
The “how do we best grow wealth” answer is about exposure to opportunities that open up the possibility of growing True Wealth (connection, experience, engagement) => each generation can, and should be encouraged) to, contribute based on their current, unpredictable and changing definition of wealth.
Together the family creates its own definition of wealth.
Each generation re-defines wealth based on its collective values.
I would have learned more if I stayed for the entire week but it’s Halloween tomorrow and I got more than enough from the experience.