The Black Swan is not the high rollers bible that some people believe it to be, but it really should be read by any investor who likes to trade on the unexpected events in the market.
Firstly we should look at the core thesis. This is that in a world where much of the investment money is shifting around on the basis of mathematical models, that there will be money to be made in those niches that mathematical models don’t predict – in Mr Taleb’s case these are the disastrous “once in a century” occurrences that seem to happen every ten years or so.
You see (and I think he’s on to something) the mathematical models have a number of flaws. Firstly they tend to take their own predictive power too seriously. Investment banks and other trading operations have put in millions to have them written and maintained. Now this is not to say that they don’t have great predictive power, they do on a day to day basis. What they can’t do is to predict the previously unknown, the black swan (the title of the book was taken from the fact that until black swans were found in Australia, everyone thought that all swans were white).
So what you should do, says Mr Taleb, is put most of your money where it is safe, and put 20% of your money on the outlandish ideas. Yes, you will lose that money most of the time, but when you win you’ll win big, and because the market is smitten with mathematical models that can’t predict the unknown – like a credit crunch or a Greek bond default – then these are seriously under-priced. And we all know it’s not about winning every time, it’s about the odds.
One niggle with the book, although other investment books are a great adventure and you can get a lot of the character out of the book, the black swan sometimes to be purely about the man, and this can get tiring. You soon get the impression that he’s a very clever man who thinks outside the box and reads widely. But we only need about ten pages to tell us that.