How to Survive and Profit From Black Swan Events
- There are some things in life that we just can’t predict. But what we can do is try to make ourselves “antifragile.”
- Today, Mark Ford shares how you can determine whether your assets are likely to be lost in an adverse event, along with the steps you can take to protect yourself.
Several years ago, Nassim Taleb came out with a bestselling book called Antifragile: Things That Gain From Disorder. You may have read it. If not, I recommend it. It’s one of those rare books that present the reader with a feast of delectable ideas – I find myself savoring every page.
Taleb’s argument is that people underestimate how much randomness there is in life and that the most important events are often unpredictable. However, it is possible not just to protect yourself from such events but also to benefit from them by being “antifragile.”
If I hadn’t read Taleb, I’m sure I would have resisted his ideas. I don’t like the idea that you can’t predict important events. I’d prefer to think that if you have enough data and enough computer power, you can.
But Taleb is a nimble thinker and a seductive writer. In Antifragile, he picks up on the “black swan” idea. He argues that there are some things in life we can predict and others we can’t.
But what we can do is determine whether something might be destroyed by an unpredictable event. A glass vase, for example, is likely to be destroyed in an earthquake. A stuffed bear is more likely to survive.
We can find ways to make our practices, programs and possessions more robust, more likely to survive catastrophic events. An even better thing we can do – and this is the core message of Antifragile – is to find ways to profit from a black swan occurrence.
Taleb’s thesis is that when it comes to the economy (among other things), we should do things that make us antifragile to economic disaster. This is more helpful than trying to predict catastrophes.
I’m sure you are thinking that this is just common sense… But as Taleb points out in Antifragile, this is the opposite of what the Fed and many financial experts do.
Some financial writers, for example, spend their careers trying to predict how certain political and economic events might forecast the ups and downs of the market. Others – technical analysts – make market predictions based on patterns they have observed in the past.
As a wealth builder, you have a choice. Adhere to the idea that markets can be timed, and search out the best models for predicting them. Or accept Taleb’s thesis and become an antifragile investor.
Protection Against Black Swans
I knew little about risk theory when, in my early 30s, I decided to become wealthy. But even then, I understood that financial predictions rarely seemed to come true, even when they were convincingly argued.
So, rather than trying to become an expert at economics or the financial markets, I made a practical plan that I hoped would allow me to create wealth without foresight. I see now that my plan was aimed at becoming antifragile.
I bought safe bonds, index funds and real estate. I eventually bought gold, too, not as a means to make money (which happened) but as a store of wealth and a hedge against inflation.
I collected art for the same reason. I figured that the value of my art might go up while other assets were going down.
And all the while, I kept investing in small businesses that I understood and could control as a key shareholder. This gave me not only the chance of equity growth but also a steady flow of current income.
My plan, in other words, was more about what I knew to be happening at the moment than what I thought would happen in the future.
I bought gold because I had been reading Bill Bonner. This was back when gold was trading at about $450 per ounce. Without gold in my portfolio, I felt fragile. So I bought gold coins, not to profit from a price surge but to protect myself.
Likewise, I got out of the rental real estate market when prices were getting too high. Everyone was sure prices would keep rising. I wasn’t sure. But if they did crash – as some writers were predicting – I wanted to be safe. So I got out of the market around 2006.
Buying gold cost me money. I saw it as an insurance premium. And a cheap one at that. Getting out of the real estate market felt like I was giving up future profits. But I considered that, too, a sort of premium – to protect the profits I’d already made from the properties I owned.
Using Taleb’s terms, buying gold and selling real estate were moves to make myself less fragile.
The Best Ways to Achieve Financial Antifragility
1) Diversify your assets into four (or more) of the following categories: cash, bonds, stocks, gold, options and rental real estate.
2) Invest in quality, dividend-paying stocks. I would define these as antifragile because of the long-term approach, the policy of buying more stock during downturns and the fact that these kinds of stocks rise quickly after drops.
3) Create a start-over plan and a start-over fund that is equal to at least six months of income. It must be enough to cover your projected costs of starting over.
4) Develop your cash-producing assets (options, performance stocks, bonds and rental real estate) so that, in time, each one will give you ample yearly income.
5) Don’t give up your active income. If you don’t have a job now, get one – even if the income is small.
6) Have some or all of your start-over funds hidden.
7) If you don’t own a business, start or invest in one. Make sure it is a business that you understand and over which you can have some control.
8) Get insurance – but only what you really need – to protect your health, your house and all of your other valuable possessions.
9) Learn about the realities of identity theft, and defend yourself accordingly.
10) Get privacy guards for all your internet activities.
I hope you’ll take these steps to become antifragile yourself.
About Mark Ford
Mark Morgan Ford is a lifelong practitioner of writing, teaching, entrepreneurship, martial arts and philanthropy. He has written more than two dozen books on business, entrepreneurship and wealth building (several of which were New York Times and Wall Street Journal bestsellers). As an entrepreneur, he has been involved in dozens of multimillion-dollar businesses, including one whose revenues exceeded $100 million and another that broke the billion-dollar mark. And as a real estate investor, he has been involved in more than a hundred projects and developments, from single-family homes to apartment buildings, office buildings and resort communities. He shares the lessons learned from his decades as an entrepreneur and investor with readers of Manward Digest.