Nassim Nicholas Taleb
(pictured), principal of Universa Investments and famed author of “The
Black Swan”, delivered a keynote speech on some useful properties of
barbells at Gaim International 2012. Noting that the opposite of fragile
is “antifragile”, Taleb explained that barbells – a type of investment
strategy that sits on both ends of the yield curve for example in bonds –
possess this antifragile characteristic, enabling them to benefit from
Barbells, then, have the capacity to turn something that’s robust into something antifragile.
If you have a lot of upside and a lot of downside in a portfolio
(left tail distribution) it’s still fragile said Taleb, noting that
antifragility has a big right tail distribution with big upside and
little downside. Constructing a barbell, said Taleb, involves “clipping
the left tail”.
In terms of strategy, said Taleb, instead of investing in medium-risk
securities you invest 80 per cent of money in zero risk securities
(left side of the barbell) and 20 per cent in maximum risk securities
(right side of the barbell). “The linear correlation is vastly superior
to medium-risk securities,” said Taleb. “Barbells put you in a situation
where error and uncertainty help.”
The reason barbells are important is because today we’re building
systems that are vulnerable to model errors. After all, small changes in
the standard deviation of tails can blow things up. You want to be
protected from any concentration of risk in the left tail and replace
that with barbells said Taleb.
“Anything that has a right tail increases with variance and these
portfolios gain from variance: we call that the barbell theory,” said
Taleb. He said that uncertainty should be welcomed because that’s what
nature itself is built on. Evolution is based on things failing and
being replaced by stronger equivalents.
Last updated : 14 Sep 2019
I am 63 yrs old uncle living in HDB heartland who has achieved financial independence @ 56 and finally retired @ 60 from full-time job as employee on 1 Oct 2016.
Single household income since 1995 with three children.
Currently, two sons and one daughter are working.
I have been doing 20 years of long-term investing and short-term trading in Singapore stock market only since Jan 2000 so I am that so-called Panda or Koala in the investment world.
I am currently executing my Three Taps solution model to maintain sustainable retirement income for life till 2038.
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