In July 2006, when local banks still ran huge proprietary trading positions, RMB sponsored my attendance at one of the world’s major hedge fund conferences, in the attractive coastal resort of Cannes in the south of France. The day before the conference started, they booked me into a full day workshop with a man whose ideas were to change much of my perspective in investing. A couple years later Nicholas Nassim Taleb would later hit the global headlines after his book Black Swan correctly predicted the massive financial meltdown of 2008. I’ve bumped into him a couple times since – once in Davos where he fitted right out, called himself a “financial activist” and swore to never return (he hasn’t). And then at the Discovery Leadership Conference where seemed somewhat intimated by Johann Rupert, allowing the cigarette and luxury goods baron share his stage during question time. A complex man with an even more complex mind. But a rare independently minded genius in a world of conformists. – Alec Hogg
CANNES – People from the rough-house southern suburbs of Johannesburg can attest to the sturdiness of the Lebanese. Although few in number, their sheer force of will, pugnacity, courage and muscle-power (aided by the occasional baseball bat) ensured that for decades, those with roots in the land of the cedar ruled entire suburbs.
From what I experienced here at an all-day workshop here ahead of the annual GAIM Hedge Fund conference, these are tribal traits.
At first appearance, Lebanese-born Nassim Nicholas Taleb (45) might even be mistaken for a youthful version of kindly Professor Calculus of Tintin comic-book fame. Then he starts to talk.
Sure, Taleb speaks mainly about on fractals, alphas, means and average deviations. But his speech is interspersed with enough four letter words to prove no communication barriers would exist the day he swigs whisky with the Turffontein home boys.
“I like to be blunt,” says New York-based Taleb. “It works for me.” And then some.
He is single handedly dismantling mathematical theory that has held sway for two centuries. His book, Fooled by Randomness, has sold a staggering 280 000 copies. In it Taleb uses facts to blast the way apparent experts ignore extreme events to compile investment portfolio theories.
Target of his ridicule is Carl Friedrich Gauss, regarded by most academics as a mathematics genius ranking alongside Archimedes and Isaac Newton. Gauss is so revered by Germans that his face adorned the old Ten Deutsche Mark bill. There’s even a crater on the moon named after the man.
But such has been Taleb’s blistering assault that were such things possible, Gauss would surely be turning in his grave at Hanover’s Albanifriedhof cemetery where he was interred 151 years ago.
Taleb only half-jokingly suggests Gauss’s disciples should be jailed “for the crimes they have committed on the rest of us.” He describes some of the world’s pre-eminent economists as “frauds” and refers to their followers as “retards” and “morons”.
Notice the similarity to Joburg’s Lebanese toughies?
Backing him up are data and other facts addressing conveniently sidelined but nevertheless nagging inaccuracies of “Gaussian” approaches.
Like: “Ten days determined more than half the investment return (on America’s S&P Index) of the past 50 years.” So, he says, it’s absurd to ignore such “outliers”, as modern portfolio theory does.
So what does all this mean to the rest of us?
A lot actually. Enough to encourage me to get hold of Taleb’s best-seller as soon as I get home. And to place an order for his soon to be published follow-up (the Black Swan).
The headlines are that he reckons we live in an increasingly inter-related world where major jolts to the investment markets are inevitable. Because of this growing complexity, the next big shock to the financial system is certain to be a lot worse than the last.
Using the Long Term Capital Management hedge fund wipeout to compare, Taleb believes: “The next LTCM will make LTCM look like a picnic.”
Not a happy picture. Then again, there’s hardly a single thinking economist who hasn’t warned about growing global imbalances. The gold price, too, has signaled that risks have been rising for years. Maybe it’s time to pay attention.
