On Wall Street, everyone has an exit strategy.
Since the Street tends to be a highly
profitable and highly unpleasant place
to work, guys promise themselves, and
their wives, that they’ll hit their number
in 10 years or so and then get out and live
the dream: become an urban planner, open a
fly-fishing school, caddy for Tiger, whatever.
But of course, few ever do. The bonus-fueled
lifestyle becomes a beast that must be fed.
Nassim Taleb is the exception. He made his big
bucks when he was young, and then pulled the rip cord.
The author of The New York Times best seller The Black Swan,
and perhaps the most sought-after financial thinker in the world,
Taleb is a former trader who predicted the global financial crisis. And he didn’t just say the sky
was going to fall, he actually described how it would happen, from the meltdown of Fannie
and Freddie to the collapse of the derivatives market.
Taleb’s cred as a market seer dates back to the mid-1980s, when he was working as a trader
for First Boston. Signs of excess were all around. It was the age of Gordon Gekko, and big
hair, red suspenders, and greed were all in style. Stock markets around the world were running
way above their historic valuations. Taleb wasn’t sure what would trigger the crash, but he was
sure it would come, so he bought “put options.” If the market rose, the options would slowly
lose value. But if it plummeted, they would be worth a fortune.
On Black Monday—October 19, 1987—Taleb’s bet paid off. As other traders were
contemplating suicide, he was sitting on roughly $35 million. His slice of that “F-you money,”
as he calls it, made him a millionaire at the age of 28. He quit working as a full-time banker,
trading only sporadically for his own pleasure and profit. “Trading was only ever about
achieving independence,” says Taleb. “I never wanted to be a businessman. Once I made my
money, I could get on with doing what I really wanted to do, which is think and write.”
Think, he did, and those thoughts gave birth to an entire philosophy based on the idea that
the markets, as well as life in general, are a lot less predictable than most of us realize. It’s a
philosophy that made Taleb even richer last fall, when everyone else was losing big. As last
year’s market slide turned into a crash, separate funds managed by Universa Investments L.P.,
a Santa Monica, California–based hedge fund Taleb advises, posted monthly returns of up to
110 percent. Taleb himself scored an eight-figure payoff in 2008.
While he won’t outline the particulars of his trading strategy (though it again involves put
options), Taleb is eager to talk about The Black Swan, the best-selling work of nonfiction of
2007. The book, which outlines his philosophy of markets and life, is quite complex, but it
is based on a simple truth. For centuries, it was taken as conventional wisdom that all swans
were white. There was no such thing as a black swan—one had never been seen anywhere in
the known world, so it couldn’t possibly exist. Then, when Australia was discovered in the
17th century, so were black swans. The wisdom of millennia had been wiped out in an instant.
Black Swans are singular, outlier events, things that can’t be predicted based on what we
think we know. Black Swans encompass the
crash of 1929, the discovery of penicillin, the
rise of the Internet, and of course, the current
global financial meltdown. Positive or negative, most of us think of them as once-in-a-lifetime 1
events, like the hundred-year flood. We don’t
plan for them, and we don’t lose sleep over
them. We live our lives—and structure our
portfolios—on a bell curve.
But to Taleb, Black Swans are inevitable—the
norm, not the exception. To think that they
won’t happen is to risk ruin, or conversely, to
The light at the
miss enormous opportunities. “The world is
end of the tunnel
extreme,” he says, “and it’s getting more so every is an oncoming train.
day. This can open you up to great danger, but
the trick is to learn
to benefit from
the fact that the
markets, like everything else, are manic-depressive.” Taleb isn’t the first to identify
the market’s mood swings—investing pioneer
Benjamin Graham described Mr. Market as
bipolar in 1949—but Taleb questions the very
concept of “normal” returns.
Taleb structures not only his portfolio
but also his life on this philosophy. Take,
for example, his low-carb diet. During our
first interview at the Campbell Apartment,
the sort of hip and atmospheric New York
City bar that used to be packed with wealthy
bankers and the lithe blond women who
dated them before the market tanked, he