(B) By popular demand, and to help one of my best friends to better invest, I will be writing a few articles about great investors who inspired me. I am planning at least to study Nassim Taleb, David Swensen, Ray Dalio, and Peter Lynch. And, I will be starting in that post with understanding Nassim Taleb’s risk management principles.

Mr. Taleb is the mind that pioneered the concept of the Black Swan, an event of low probability but one which can have a huge impact that will drive major changes over time. He suggests to always favor, in what we are doing as an individual, a nation or a civilization, to being exposed to positive Swans – the Swans that provide a positive impact – and avoiding as much as we can to be exposed to negative Swans – the Swans that can damage or even destroy us.

For more on the nature and behaviors of Black Swans, please read “Black Swans Gray Swans and White Swans”.

The long-term performance of a portfolio is not smooth and steady over time but largely determined by a few significant market moves generated by Black Swans. The occurrence of a Black Swan can trigger market bubbles (positive Black Swans) or market crashes (negative Black Swans) and leads to large creations or destructions of wealth in a portfolio.

For more on about long-term portfolio dependency to Black Swans, please read “The Risk of a Black Swan in Your Portfolio”.

A non-conventional investment practice to pursue Mr. Taleb’s risk strategy is to be hyper-conservative when exposed to negative Black Swans, the ones that crash the stock markets, and to be hyper-aggressive when exposed to the positive Black Swans, the ones that can lift the markets up.

For Mr. Taleb’s being hyper-conservative implies investing 85 to 90% of his portfolio in Treasury bills to avoid any market risks while being hyper-aggressive implies investing the remaining 10 to 15% of his portfolio in new ventures where the downside is limited (the worst case is that all the money is lost) but where the upside can be very significant (start-up acquisition or IPO). Returns from the treasury bills will offset losses from venture investing. The portfolio will always have positive returns. However, to expect the reward of a positive Black Swan, that portfolio needs to be kept for many years.

So, the following is the structure of a simple portfolio created with Mr. Taleb’s investing principles:

• Treasury Bills – 85%
• Venture Investing – 15%
• Total: 100%

References
A Silicon Valley Insider, Black Swans Gray Swans, and White Swans
A Silicon Valley Insider, The Risk of a Black Swan in Your Portfolio

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