On the side (of web design and development, teaching, etc) I like to read and think about investing.  The Intelligent Investor is my favorite book on investing, written by the brilliant man Benjamin Graham.  The reason it is my favorite book is that it makes practical sense to me.  It seems wise.  It rails against speculation.  It is about as conservative and grounded an investing strategy as you can get.

As I read through Taleb’s The Black Swan, I recognized an idea that is complementary.  It is all about limiting your risk to the unknown – which is really what Graham was getting at.  Here’s Taleb’s approach:

I am trying here to generalize to real life the notion of the “barbell” strategy I used as a trader, which is as follows.  If you know that you are vulnerable to prediction errors, and if you accept that most “risk measures” are flawed, because of the Black Swan, then your strategy is to be as hyper conservative and hyper aggressive as you can instead of being mildly aggressive or conservative.  Instead of putting your money in “medium risk” investments (how do you know it is medium risk?  By listening to tenure-seeking “experts”?), you need to put a portion, say 85-90 percent, in extremely safe instruments, like Treasury bills – as safe a class of instruments as you can manage to find on this planet.  The remaining 10 to 15 percent you put in extremely speculative bets, as leveraged as possible (like options), preferably venture capital-syle portfolios.  That way you do not depend on errors of risk management; no Black Swan can hurt you at all beyond your “floor,” the nest egg that you have in maximally investments.  Or, equivalently, you can have a speculative portfolio and insure it (if possible) against losses of more than, say, 15 percent.  You are “clipping” your incomputable risk, the one that is harmful to you.  Instead of having medium risk, you have high risk on one side and no risk on the other.  The average will be medium risk, but constitutes a positive exposure to the Black Swan.  More technically, this can be called a “convex” combination.

The Black Swan, pages 205-206

In addition to it’s application to investing, this idea can be applied to life.  And, indeed, Taleb details what that might look like at a later point in the book.  But the idea is to be conservative in your job, in your pursuits, etc with all but 10-15 percent of your life.  In that other 10-15 percent you take risks that have maximum upside.  As in, look for opportunities that “scale” (as a business person might say).  You look for things that allow you to input some amount (time, money, etc) but can return gains that are non-proportional.  I can put this idea in the negative better than the positive: if you plan on making widgets, your earnings will always be proportional with the number of widgets you make.  Sure, you may be able to raise the price, but you will always have to work harder to make more widgets and make more money.  If, instead, I could write a book, there’s a chance that book will sell millions of copies (*cough* Harry Potter *cough*) and give me a disproportionate return.  As in, I write one book which takes me x hours (say 200 hours).  The more books I sell, the more I make for those 200 hours – I do not (necessarily) need to work more hours to make more money.  David Heinemeier Hansson from 37 Signals talks about this same idea.

Anyway, it’s a very interesting idea to me and I wonder how this might apply to both my career and my investments.

In order to succeed you must take risk.  If you take risks, you’re going to fail.  The question is not if you’ll fail at some point in your life, but when?  And when you fail, what will you do?

Over and over I hear this concept from great men and women in business and in life.  The most successful are always the ones that have endured failure and still kept going.  But I would also say, the fastest to success are the quickest to recognize failure.  Speed of iteration is really important, not just the fact that you do iterate.

I listened to a talk recently that basically said this: “If you have an idea, identify the failure points as best you can.  Once you’ve identified those points, get to those points as soon as you can – because if you can overcome those your idea will work.  If you can’t overcome those points, your idea will not work.  And the faster you know your idea won’t work, the quicker you can move on to the next idea.”

If we were being honest most of us would be forced to admit that we run from failure.  We try to ignore the ways in which a thing will not work out because we all want to be successful.  But the most successful people don’t avoid failure, they just fail more quickly.  They don’t hold on to the things that won’t work, they move on quickly to the next idea.

Think of it this way: Let’s say 1 in 20 ideas succeed.  The problem is, you don’t know whether it’s number 1, 17 or 20.  So the quicker you try the first and figure out if it will fail, the quicker you can move on to the next idea.  And if that great idea is number 15, the first person to 15 wins.  The first person to chalk all those ideas up as failures, admit they were wrong, show some humility and move on, wins.

So fail fast, fail often.  Learn to recognize the breaking points and test those as quickly as possible.  Be humble and admit when something doesn’t/won’t work.  Learn from your mistakes and know when to move on.  Thomas Edison, commenting on his light bulb experiments, said “I haven’t failed. I’ve just found 10,000 ways that do not work.”

Here are some interesting talks having to do with risk and failure.  All of these are from Stanford:

Tom Kelly

Judy Estrin

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