The Hydra of Greek myth is a many-headed serpent with a bad temper. But it has a special ability that makes it very hard to kill. When you cut off one head, two grow back in its place.
To author Nassim Nicholas Taleb, the Hydra is the perfect metaphor for “antifragility.” The awkward and invented word is the title of his latest book, subtitled Things That Gain From Disorder.
It is a simple enough concept, but it is rich in application.
As an investor, antifragility captures an idea that I think will be more important in our crisis-filled times. In short, you want to own some Hydras in your portfolio.
Let us start with this aspect of the idea: You can’t predict when or what the next shock will be. (Unless you enjoy deceiving yourself, as Taleb points out.) But you can “state with a lot more confidence that an object or a structure is more fragile than another, should a certain event happen.”
For example, you can state with confidence that a porcelain vase is more fragile than a steel pot if dropped. You can look at one building and deduce it will withstand an earthquake better than another. And you can compare stocks and say which is more likely to survive a crisis.
While reading the book, I kept thinking of companies I like that exhibit traits of antifragility. Like banks that did not suffer in the financial crisis, but used the opportunity to buy failed banks for cheap. Or like real estate companies that find deals in distressed assets. I also thought of reinsurance as an example of a great antifragile business.
Then, on Page 73 of Taleb’s book, I read:
“Some businesses love their own mistakes. Reinsurance companies, who focus on insuring catastrophic risks (and are used by insurance companies to ‘reinsure’ such nondiversifiable risks), manage to do well after a calamity or tail event causes them to take a hit. If they are still in business and ‘have their powder dry’ (few manage to have plans for such contingency), they make it up by disproportionately raising premia…”
All the reinsurer has to do is keep mistakes small and maintain a nice cushion? Such a reinsurer has awesome antifragile properties.
I picked up on a similar theme in the June 1993 issue of Schiff’s Insurance Observer in a piece titled “Smoking TNT and Drinking Dynamite: It’s Business as Usual in the Insurance Industry.”
Insurance is one of those quirky industries for which bad news is good news, a point we should keep in mind as insurers take their beating from Hurricane Sandy. As Schiff writes, “Earthquakes, hailstorms, explosions, blizzards, tornadoes and tropical storms are considered augurs of better times to come.”
The theory is that as insurers take their lumps, there is less insurance capital around. Less capital around means higher prices for insurance. In this way, insurers make up the losses and then some. It doesn’t always work out that way, of course, but often seems to.
Point being, reinsurance would seem a rare industry that gains from disorder. It is a Hydra. Hydras, though, don’t dwell only in certain industries. There are characteristics that cut across industries. I can’t do justice to the many ideas in Taleb’s book here, but I want to highlight one.
“Skin in the Game” is a chapter in Taleb’s book. Simply put, if you want antifragility, it helps to have insiders with money on the line. No upside for anyone without downside. No freebooting CEOs with golden parachutes when they fail. No wonder, then, “there seems to be a survival advantage to small or medium-sized owner-operated or family-owned companies… There is a difference between a manager running a company that is not his own and an owner-operated business.” The latter has downside.
Clearly, most of the stock market does not operate on this principle. Instead, most corporate “suits” have “incentives” but minimal ownership. They get a free ride at the shareholders’ expense.
Taleb uses the example of Robert Rubin, who made $120 million in a decade at Citibank. Citibank collapsed, but Rubin kept his money. Shareholders lost. (And taxpayers, too, unfortunately.) This aspect of modern markets really irritates me. I get grumpier about it as I get older. I’m at risk of becoming a curmudgeon.
Fortunately, as fragile as much of the market and its corporations may be, there are always exceptions. I want to own the exceptions. And some of these even profit from this world of disorder. Which reminds me of another metaphor I thought of for antifragility: the fictional private detective Philip Marlowe. In one of Raymond Chandler’s short stories, Marlowe says: “Trouble is my business. How else would I make a nickel?”
Chris Mayerfor The Daily Reckoning
The trouble with today’s financial system is that the authorities are trying to de-risk it, suckering everyone into behaving recklessly.
Chris Mayer is managing editor of the Capital and Crisis and Mayer's Special Situations newsletters. Graduating magna cum laude with a degree in finance and an MBA from the University of Maryland, he began his business career as a corporate banker. Mayer left the banking industry after ten years and signed on with Agora Financial. His book, Invest Like a Dealmaker, Secrets of a Former Banking Insider, documents his ability to analyze macro issues and micro investment opportunities to produce an exceptional long-term track record of winning ideas. In April 2012, Chris released his newest book World Right Side Up: Investing Across Six Continents.
Pingback: home business system
Pingback: roofing marietta ga
Pingback: tree removal service atlanta
Pingback: tile installation doraville ga
Pingback: tree trimming atlanta
Pingback: atlanta tree service - click here
Pingback: click here
Pingback: water damage repair atlanta ga
Pingback: atlanta home remodeling - click here
Pingback: isa certified atlanta arborist - click here
Pingback: Facebook Company Page
Pingback: Buy No2 Maximus
Pingback: Allstate VA
Pingback: more inside
Pingback: watch it here
Pingback: garage door service
Pingback: Max CDN coupon
Pingback: iPad Video Lessons Review
Pingback: this links
Pingback: How To Make A Million Fast
Pingback: VigRX Plus review
Pingback: paleo cookbook recipes
Pingback: notary public round rock texas
Pingback: why not find out more
Pingback: you can try this out
Pingback: notary open on sunday in austin tx
Pingback: west lake hills tx notaries
Pingback: Subs and Salads for Leesburg and Loudoun
Pingback: Weight Loss Supplement For Women
Pingback: rapid weight loss
Pingback: video seo company
Pingback: search marketing company
Pingback: reading email
Pingback: finaflex epi v
Pingback: pheromone perfume marilyn miglin
Pingback: cures for acne scars
Pingback: med plus health blog
Pingback: technology blog emispec
Pingback: travel blog
Pingback: text your ex back ebook
Pingback: ben pakulski diet
Pingback: the truth about fat burning foods
Pingback: home remedies for thinning hair
Pingback: babes of heathrow
Pingback: buzz fone
Pingback: quotes on marriage
Pingback: What does your Name Mean
Pingback: customized fat loss review
Pingback: how to choose a business name
Pingback: Save on home insurance cost-efficient quotes
Pingback: free coloring pages for kids
Pingback: cigarette electronique
Pingback: how to cure psoriasis
Pingback: 9 am press blog
Pingback: automated seo software
Pingback: Portal Randkowy
Pingback: custom drapery
Pingback: SEO Training Regina
Pingback: real estate Australia
Pingback: fifa 14soccer
Pingback: pure cambogia extract
Pingback: ekskluzywna posciel
Pingback: illuminati mind control
Pingback: right here
Pingback: Jobs you can do from home
Pingback: this link
Pingback: click this link
Pingback: nikon d3200 price in india
Pingback: seo in Calgary
Pingback: graphologie exemple
Pingback: read more
Pingback: Agencies Regina
Pingback: car dealer
Pingback: Shopify Pricing
Pingback: Dreamhost Review
Pingback: Lunarpages Review
Pingback: everyone likes these pizzas
Pingback: this site
Believe it or not, more capital for a company doesn't necessarily mean better returns for investors. In fact, in a recent study that dug through data from more than 200 acquisitions going back to 2006, they found a "sweet spot" for the most likely acquisition targets. And it's lower than you think. Matthew Milner explains...
The Affordable Care Act dumped 2,000 pages of regulations into the health care sector, stifling any innovation that could have brought about real cost savings. But even with these obstacles, there are still people looking for ways to do things better and at a lower cost. These new technologies could be the key to fixing health care in America...
While many of the newer social media stocks struggle for gains this year, old-school tech stocks have become some of the best trades on the market. With the rare exception (Facebook is doing well—shares are up 26% year-to-date) the social stocks are in the gutter. They got off to a fast start in January and Februray, but ran out of steam in the spring. Aside from a few feeble attempts, few have posted anything close to a noteworthy comeback. Twitter, LinkedIn, and Groupon are all down double-digits year-to-date. Groupon—the worst performer on this short list—is down 47%. On the other had, the biggest of the big tech stocks on the market are helping traders pile up even larger gains right now. Greg Guenthner explains…
In the 1960s, total credit in the U.S. broke the one trillion dollar mark...and since then, it has expanded over 50 times. But now, as Richard Duncan explains, the explosion of credit that's made America prosperous, threatens to take the entire economy down. And that could mean the return of another depression...
News flash: The future is uncertain. (Gasp!) But given this uncertainty how are you supposed to invest successfully? It would be nice to ride stocks on the way up... and bow out before the crash... but few are able to do it without sheer luck. Chris Mayer, searching for a successful method, looks back to the 1929 market crash for clues...