Three Longs & Three Shorts

Published on: 13 Jan, 2019

At the end of each week, we will share with you our favourite reads. We would be grateful if you could reciprocate. This week’s reads focus on Taleb’s investment strategy, the Transgender bill, IQ as a measure of intelligence, the growing demand for Oat milk and why people prefer bad news.

1. Long read: Blowing up – How Nassim Taleb turned the inevitability of disaster into an investment strategy.
Author: Malcolm Gladwell
Source: New Yorker (

“Taleb runs Empirica Capital out of an anonymous concrete office park in the woods on the outskirts of Greenwich, Connecticut…. Empirica follows a very particular investment strategy. It trades options, which is to say that it deals not in stocks and bonds but in the volatility of stocks and bonds… Nassim Taleb and his team at Empirica are quants. But they reject the quant orthodoxy; because they don’t believe that things like the stock market behave in the way that physical phenomena like mortality statistics do. Physical events, whether death rates or poker games, are the predictable function of a limited and stable set of factors, and tend to follow what statisticians call a “normal distribution” — a bell curve. But do the ups and downs of the market follow a bell curve? The economist Eugene Fama once pointed out that if the movement of stock prices followed a normal distribution you’d expect a really big jump — what he specified as a movement five standard deviations from the mean — once every seven thousand years. In fact, jumps of that magnitude happen in the stock market every three or four years, because investors don’t behave with any kind of statistical orderliness….

In the summer of 1997, Taleb predicted that hedge finds like Long-Term Capital Management were headed for trouble, because they did not understand this notion of fat tails. Just a year later, L.T.C.M. sold an extraordinary number of longdated indexed options, because its computer models told it that the markets ought to be calming down. And what happened? The Russian government defaulted on its bonds; the markets went crazy; and in a matter of weeks L.T.C.M. was finished. Mark Spitznagel, Taleb’s head trader, says that he recently heard one of the former top executives of L.T.C.M. give a lecture in which he defended the gamble that the fund had made. “What he said was ‘Look, when I drive home every night in the fall I see all these leaves scattered around the base of the trees,’“ Spitznagel recounts. “‘There is a statistical distribution that governs the way they fall, and I can be pretty accurate in figuring out what that distribution is going to be. But one day I came home and the leaves were in little piles. Does that falsify my theory that there are statistical rules governing how leaves fall? No. It was a man-made event.’“ In other words, the Russians, by defaulting on their bonds, did something that they were not supposed to do, a once-in-a-lifetime, rule-breaking event. But this, to Taleb, is just the point: in the markets, unlike in the physical universe, the rules of the game can be changed. Central banks can decide to default on government-backed securities…
Taleb likes to invoke Popper: “No amount of observations of white swans can allow the inference that all swans are white, but the observation of a single black swan is sufficient to refute that conclusion.” Because L.T.C.M. had never seen a black swan in Russia, it thought no Russian black swans existed.

Taleb, by contrast, has constructed a trading philosophy predicated entirely on the existence of black swans — on the possibility of some random, unexpected event sweeping the markets. He never sells options, then. He only buys them. He’s never the one who can lose a great deal of money if G.M. stock suddenly plunges. Nor does he ever bet on the market’s moving in one direction or another. That would require Taleb to assume that he understands the market, and he knows that he doesn’t. He doesn’t have Warren Buffett’s confidence. So he buys options on both sides — on the possibility of the market’s moving both up and down. And he doesn’t bet on minor fluctuations in the market. Why bother? If everyone else is vastly underestimating the possibility of rare events, then an option on G.M. at, say, forty dollars is going to be undervalued. So Taleb buys out-of-themoney options by the truckload. He buys them for hundreds of different stocks, and if they expire worthless he simply buys more. Taleb doesn’t even invest in stocks — not for Empirica and not for his own personal account. Buying a stock, unlike buying an option, is a gamble that the future will represent an improved version of the past. And who knows whether that will be true?… Taleb’s hero…is Karl Popper, who said that you cannot know with certainty that a theory is true; you can only know that it is not true.”

2. Long read: Bitter Bill – India’s transgender community is going to be policed by a bill which gives the Government the right to examine their bodies
Author: Nikita Puri
Source: Business Standard (
In case you are on those people who spends her waking hours worrying what will happen in the next General Election or some other pressing matter of national import, here is a public policy issue which should make you sit up. The Lok Sabha has passed a Bill which says that when a parent or immediate family is unable to take care of a transgender person, “the competent court shall by an order direct such person to be placed in a rehab centre.”

The Bill says that a transgender person needs to get a special identity card and to get such a card they have to follow a two step process. Firstly, they have to meet the District Magistrate who will direct her/him to a screening committee which will physically examine the transgender person. The screening committee will include a psychologist and a government official. Only once the committee classifies a person as “transgender” can he/she access the welfare schemes provided by the Government.

Then comes step two. “…the second step for registration as a transgender person is surgery (paid for by the state)…the Bill says that only once you surgically change your body will your gender be set right.”

The bill says nothing about the civil rights of transgender people such as marriage, civil partnership, property rights, and so on.

3. Long read: IQ is largely a pseudoscientific swindle
Author: Nassim Nicholas Taleb
Source: Medium ( )

More of Taleb this week, this one is by Taleb. In his usual scathingly critical style, he has a go at psychologists and their use of IQ as a measure of intelligence with plenty of evidence showing the corelation is non-existent, except that lower IQ levels do prove mental disability.

“…consider that if someone has mental needs, there will be 100% correlation between performance and IQ tests. But the performance doesn’t correlate as well at higher levels, though the psychologists will think it does.(The statistical spin, as a marketing argument, is that a person with an IQ of 70 cannot prove theorems, which is obvious for a measure of unintelligence — but they fail to reveal how many IQs of 150 are doing menial jobs)…

…If someone came up with a numerical “Well Being Quotient” WBQ or “Sleep Quotient”, SQ, trying to mimic temperature or a physical quantity, you’d find it absurd. But put enough academics w/physics envy on it and it will become an official measure…..

…The argument by psychologists to make IQ useful is of the sort: who would you like to do brain surgery on you/who would you hire in your company/who would you recommend, someone with a 90 IQ or one with 130is …academic. Well, you pick people on task-specific performance, which should include this filtering. In the real world you interview people from their CV (not from some IQ sent to you as in a thought experiment), and, once you have their CV, the 68 IQ fellow is weeded out. So the only think for which IQ can select, the mentally disabled, is already weeded out in real life: he/she can’t have a degree in engineering or medicine. Which explains why IQ is unnecessary and using it is risky because you miss out on the Einsteins and Feynmans.”

4. Short read: WhatsApp’s child porn problem: Google and Facebook’s ad networks funded apps that led users to groups on the private messenger that are dedicated to swapping illegal images
Author: Tim Collins
Source: Daily Mail (

In case you thought that the worst thing about social media is that it allows facists and religious fundamentals to spread hatred, think again. In the last week of December two charities in Israel dedicated to online safety, Netivei Reshet and Screensaverz, published research showing that WhatsApp is now the favoured method to circulate child porn.

“WhatsApp is being used to distribute child porn via third party apps that have received funding from Google and Facebook’s advertising networks. That’s the finding of an investigation into the growing problem of illegal images of children on the instant messaging service. Paedophiles have been abusing the protection offered by the app’s data encryption to spread vile images of abuse on private groups. These groups can be discovered through specially created third-party software, which offenders use to seek them out, that can be downloaded from app stores. Now it has been discovered that these third-party apps were receiving funding via Google and Facebook’s advertising networks….

The true scale of the problem emerged after Israeli researchers warned Facebook – the owner of WhatsApp – in September how easy it was to find and join group chats dedicated to the spread of child pornography.

In some cases, up to 256 people were sharing sexual images and videos of children, according to reports in the Financial Times (FT).

The matter escalated in recent weeks when two charities in Israel dedicated to online safety, Netivei Reshet and Screensaverz, made their findings public. Over the course of several months they discovered identifiers – that were not encrypted and able to be viewed publicly – advertising the disturbing contents of said groups.

Speaking to the FT on December 20, Netivei Reshet’s Yona Pressburger said: ‘It is a disaster: this sort of material was once mostly found on the darknet, but now it’s on WhatsApp.’”

5. Short read: Oat milk sales surge as more consumers go dairy-free
Author: Emiko Terazano
Source: Financial Times (

Milk from cows or from soya beans or almonds is passe. The new fad is milk from oats. “The scramble for oat milk is so intense that Oatly, a large Swedish producer, has been forced to delay production of certain products so that it can meet demand in existing markets such as the US and the UK.

“We’re seeing hyper growth in demand,” said Ishen Paran, UK general manager at Oatly, which expected its turnover this year to rise almost 60 per cent to £84m…oat milk sales have outstripped those of almond milk in the past year, while soya milk sales have fallen. The thirst for oat milk has prompted large food groups to try to cash in, with PepsiCo, the owner of Quaker Oats, planning to launch oat milk lines to US consumers next month.

Oat milk retail sales surged almost 50 per cent in the 52 weeks to early August in the US, according to data from consumer data firm Nielsen. That compares with 9 per cent growth in overall plant-based milk and 11 per cent for almond milk.

“Oatly is really good with coffee and people like its texture,” said Tom Bailey, senior dairy analyst at Rabobank. Its popularity has been helped by hip US and UK coffee shops, due to its “Barista edition”, designed to froth like cow’s milk.”

6. Short read: Why people prefer bad news
Author: Matt Ridley
Source: Rational Optimist (

The article reinforces the subject of “Factfulness”, the refreshingly positive and fascinating book by the late Dr Hans Rosling about how we have a tendency to take a predominantly depressing view of the world when in reality it is exactly the opposite – the fact show as much – read Dr Rosling. Matt Ridley, who himself has authored a book on the subject, highlights some typical reasons for our pessimistic behaviour.

“No matter how persuasive our evidence, we routinely encounter disbelief and even hostility, as if accentuating the positive was callous. People cling to pessimism about the state of the world. John Stuart Mill neatly summarized this tendency as far back as 1828: “I have observed that not the man who hopes when others despair, but the man who despairs when others hope, is admired by a large class of persons as a sage.” It’s cool to be gloomy….

… Plane crashes have been getting steadily scarcer—2017 was the first year with no commercial passenger plane crashes at all, despite four billion people in the air—but each one now receives vastly more coverage. Many people still consider planes a risky mode of transport…. 

….This is part of what psychologists call the “availability bias,” a quirk of human cognition first noticed by Amos Tversky and Daniel Kahneman in the 1970s. People vastly overestimate the frequency of crime, because crime disproportionately dominates the news. But random violence makes the news because it is rare, whereas routine kindness doesn’t make the news because it is so common….

….But as the historian Lord Macaulay wrote almost two centuries ago, “On what principle is it that with nothing but improvement behind us, we are to expect nothing but deterioration before us?”

So cheer up. The world’s doing better than you think.”

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