Nassim Taleb: In Investing The People You Understand Most Easily Are Necessarily The Bull***tters.

Johnny HopkinsInvesting Strategy, Nassim TalebLeave a Comment

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Here’s a great passage from Skin In The Game by Nassim Taleb in which he discusses how easily investors can be hoodwinked by smooth talking salepeople promising outsized returns and, how often the best investing advice comes from those least able to explain it best.

Here’s an excerpt from the book:

The idea of this chapter is Lindy[1]-compatible. Don’t think that beautiful apples taste better, goes the Latin saying. This is a subtler version of the common phrase “all that glitters is not gold”—something it has taken consumers half a century to figure out; even then, as they have been continuously fooled by the aesthetics of produce.

An expert rule in my business is to never hire a well-dressed trader. But it goes beyond:

Hire the successful trader, conditional on a solid track record, whose details you can understand the least.

Not the most: the least. Why so?

I’ve introduced this point in Antifragile, where I called it the green lumber fallacy. A fellow made a fortune in green lumber without knowing what appears to be essential details about the product he traded—he wasn’t aware that green lumber stood for freshly cut wood, not lumber that was painted green.

Meanwhile, by contrast, the person who related the story went bankrupt while knowing every intimate detail about the green lumber. The fallacy is that what one may need to know in the real world does not necessarily match what one can perceive through intellect: it doesn’t mean that details are not relevant, only that those we tend (IYI-style) to believe are important can distract us from more central attributes of the price mechanism.

In any activity, hidden details are only revealed via Lindy.

Another aspect:

What can be phrased and expressed in a clear narrative that convinces suckers will be a sucker trap.

My friend Terry B., who taught an investment class, invited two speakers. One looked the part of the investment manager, down to a tee: tailored clothes, expensive watch, shiny shoes, and clarity of exposition. He also talked big, projecting the type of confidence you would desire in an executive. The second looked closer to our butcher-surgeon and was totally incomprehensible; he even gave the impression that he was confused. Now, when Terry asked the students which of the two they believed was more successful, they didn’t even get close.

The first, not unexpectedly, was in the equivalent of the soup kitchen of that business; the second was at least a centimillionaire.

The late Jimmy Powers, a die-hard New York Irishman with whom I worked in an investment bank early in my trading career, was successful in spite of being a college dropout, with the background of a minor Brooklyn street gangster.

He would discuss our trading activities in meetings with such sentences as: “We did this and then did that, badaboom, badabing, and then it was all groovy,” to an audience of extremely befuddled executives who didn’t mind not understanding what he was talking about, so long as our department was profitable. Remarkably, after a while, I learned to effortlessly understand what Jimmy meant. I also learned, in my early twenties, that the people you understand most easily were necessarily the bull***tters.

1. The Lindy effect is a concept that the future life expectancy of some non-perishable things like a technology or an idea is proportional to their current age, so that every additional period of survival implies a longer remaining life expectancy.

Example: If a book has been in print for forty years, I can expect it to be in print for another forty years. But, and that is the main difference, if it survives another decade, then it will be expected to be in print another fifty years. This, simply, as a rule, tells you why things that have been around for a long time are not “aging” like persons, but “aging” in reverse. Every year that passes without extinction doubles the additional life expectancy. This is an indicator of some robustness. The robustness of an item is proportional to its life!

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