Dumbbells

 

Based on several references from my readers in the comments section, I am chipping away the book Antifragile by Nassim Taleb. I have a paper-copy in one of our water-closets.

One of the no-brainer strategies he suggests as a generic template for designing systems that gain from chaos and disorder is to "dumbbell" them.

This appeals to me because in a prior lifetime I fiddled with simulations of financial portfolios where the assets were rebalanced to automatically "harvest" the gains of the individual sectors that had out-performed and invest those monies in sectors that had lagged.

You don't have to run too many simulations before you realize that the best performance occurs when there is more separation between the classes you are playing with.

Source of graphic

For instance, over the long time-horizon one will consistently show much better appreciation and less volatility if you have a "wide" dumbbell of short-term Government bonds and a mix of US and International "Growth" equities of mixed company sizes.

Note: Companies with high Price-Earnings ratios are sometimes called "Growth" stocks while companies with low Price-Earnings ratios are called "Value" stocks.

One COULD invest in sectors that are close together on the investment map, say mid-sized and large low-PE companies or large low-PE and high-PE companies but the tide that raises and lowers them is synchronized and there is no time-offset that will contribute to the harvest.

Time domain

Another axis to consider is time.

What would I invest my time in if I knew I was going to die tomorrow? In 365 days? At my 3-score-and-10 (i.e. about five years). In twenty years?

If I thought I was going to die or become severely disabled in 365 days, I would directly plant seed-nuts in the field as I would not be able to move seedlings from the nursery to their final destination. I would plant the seeds more densely than I would plant seedlings (in general) because there would be high mortality.

I would also invest an inordinate amount of effort into "hardening" our house so the lovely Mrs ERJ would not have to worry about system-failures during her lifetime.

If I KNEW that I would be hale-and-hearty 20 years from now, I would plant the seeds in a nursery and transplant as one or two year-old seedlings. If I KNEW I would be around to care for them, I would plant them more densely since I would be around to cull the poor producers and the ones that produce poor quality nuts and fruit.

With regard to the hardening-of-our-house, I would put a concerted effort into correcting "short-cuts" that had been made during the hurly-burly of raising our kids.

One thing that my Dad showed genius at was that before he retired at the age of 67, he made sure that every major system in his house was "refreshed". New roof. New furnace and ducting. New light bulbs. New refrigerator....

He listened to coworkers who had retired and they told him that they did not feel that contractors "listened" to them after they had retired. They suspected that they might have been taken advantage of. They did not feel respected.

That ship already sailed for me. I am already retired. But I believe that a tradesman or contractor will be more attentive to a 64-year-old describing a problem than they will be to an 84 year-old. That is reality.

If you have been reading the blog for a while, you might have noticed that we upgraded with a new refrigerator, new washing machine, new dryer, new steel roof, new truck for me, new minivan for Mrs ERJ...in the last five years. I was paying attention to Dad. I might not be able to milk them for twenty years but I don't expect to be doing a lot of driving after I am 80.