Talibi’s books “The Black Swan” and “Fooled by Randomness” argue, reasonably convincingly, that extreme events are under priced in the current market due to a lack of experience and the over reliance on mathematical models in trading.
To take advantage of this they advocate a “dumbbell strategy” which basically is that 80% of assets are kept in the safest types of stocks, blue chip corporate bonds or government gilts which slowly bear interest. The other 20% of assets should be kept in stocks that will pay out big when the market either goes into unexpected overdrive or goes catastrophically wrong.
The only problem for the smaller investor is that Talibi advocates the use of “out of the money” derivatives. These are options that either gives a right to buy a stock at a far higher price than the current market price or sell a stock at a far lower price. This can be difficult for a smaller investor as it can be rather expensive for a person with a small amount of capital and not amenable to the large amount of small bets that the strategy entails.
However spread bets and contracts for difference are very good for the small investor looking to implement this strategy. This can be done with a tiny amount of money which means that a large portfolio of positions can be built up that will be relatively inexpensive to close and that will pay out in a big way if the market goes ballistic, one way or the other.
Once again CFDs and spread betting fill in the gaps to enable a spread betting strategy for the smaller investor that was previously only the preserve of the big players.