Books that should be read more than once.
Antifragile: Things That Gain from Disorder
While Taleb’s previous two books—Fooled by Randomness and The Black Swan—focused on overconfidence and underestimation of risk, Antifragile is the antidote on how we can reduce fragility and in the process, gain from disorder and randomness.
Antifragile provides a view that doing something supposedly harmful (not too much) can be beneficial. Here are some examples:
Take margin loan for example. It is a great way to magnify gains. But it increases fragility because when randomness is high, you are forced to cover your positions. And in most cases, you blow up overnight. What about cut-loss? Having a cut-loss point works in normal conditions. But under extreme conditions when the market collapses, any speculative position will put a hole in your portfolio because there isn’t any buy-side liquidity.
If you notice the examples above, it is all about understanding what’s the maximum risk, or the worst-case scenario. The reason is that finance and investing is non-ergodic. Or what I called don’t cross a river that’s average 4 ft. deep. Ole Peters, an External Professor at Santa Fe Institute, describes antifragility as a way to achieve more ergodicity. How do you do that? Taleb suggests a barbell investment strategy: 50% investment in a safe haven i.e low risk fixed investment such as bonds and the rest in high risk venture.
Now you don’t have to necessarily agree with Taleb but once you understand antifragility, it can be a very powerful thinking tool. You can start thinking about what aspects of your portfolio are fragile. What about companies? What kind of businesses are the most vulnerable when randomness is high? What about life? Do you have any habits that increase fragility? Can you change that?
Seth Klarman once said “Accepting that we cannot predict the future—i.e., that there will always be unexpected and highly consequential events—is the first step in becoming less fragile and more adaptable. People should be highly skeptical of anyone’s, including their own, ability to predict the future, and instead pursue strategies that can survive whatever may occur.”
Range: How Generalists Triumph in a Specialised World
I like this book because it is reminiscent of the foxes and the hedgehogs in Philip Tetlock’s book Superforecasting. The hedgehogs know one big thing while the foxes know many things. Foxes are generalists, like an army Swiss knife that can do multiple tasks. Robert Hagstrom called investing ‘The last liberal art’ because it requires a good understanding of a wide range of fields if one is to succeed. It is also what Charlie Munger called a latticework of mental models—having many tools in your toolbox to solve unique problems.
If you zoom out and look at the big picture, investing is about solving problems. We have to answer questions like “Can this stock continue growing?” What is the right price to pay? How will the industry dynamic affect the business? How much should I have this stock in my portfolio? etc.
In one of the studies, Epstein wrote: “successful problem solvers are more able to determine the deep structure of the problem before they proceed to match a strategy to it.” That’s another way of saying you need to understand the fundamentals and see the problem from many different perspectives.
We currently live in a wicked world. One that requires plenty of abstract thinking, thought experiment, learning without experience, and one that can only be achieved by studying broad concepts from many different domains. The business world is wicked. No two companies out there are alike. Each is unique in its way. Even those that succeed don’t use the same strategy or follow a specific path. When we encounter a situation we’ve never seen before, we tend to apply categorical thinking. We group companies by attributes such as a similar P/E ratio, by industry, and so on because it makes it easier for us to solve the problem. But an even better way is to apply abstract and analogical thinking.
“Breadth of training predicts breadth of transfer…the more contexts in which something is learned, the more the learner creates an abstract model, and the less they rely on a particular example. Learners become better at applying their knowledge to a situation they’ve never seen before, which is the essence of creativity.”
According to the Future of Jobs Report, the top 3 skills in 2020 are complex problem solving, critical thinking, and creativity. As we move towards industry 4.0—automation and data exchange in manufacturing technologies and processes, internet of things, artificial intelligence, learning to be like a fox becomes more of a necessity than a luxury.
Barking Up the Wrong Tree: The Surprising Science Behind Why Everything You Know About Success Is (Mostly) Wrong
I’ve been following Eric Barker’s blog for some time when he wrote this book. I wasn’t expecting much from this book, perhaps just a compilation of his blog posts. I was wrong. Barker has produced a well-researched book with amazing narratives on how to be successful.
Barker looks into what produces success by answering some perplexing questions we often encounter in life over a large variety of situations from career, relationship to finance and business. Should we play safe or risk it all? Do nice guys finish last? Do quitters never win or winners never quit? Is it what you know or more about who you know? Is it all about work or work-life balance? etc.
If you want a concise answer: it depends. Nothing is absolute in life. That is, what is the right decision to make often depends on the context of the situation. There is rarely ever a time where if A is good, doing A is good under all circumstances. Context matters because success cannot be condensed into a single formula. It is more about learning how to do the right thing at the right time. On top of these, know your strength, tell yourself a positive story, and practice self-compassion, these are the ingredients to a happy life.
Barker sums up what you need to do to succeed this way, “What’s the most important thing to remember when it comes to success? One word: alignment. Success is not the result of a single quality; it’s about alignment between who you are and where you choose to be. The right skill in the right role. A good person surrounded by other good people. A story that connects you with the world in a way that keeps you going. A network that helps you, and a job that leverages your natural introversion and extroversion. A level of confidence that keeps you going while learning and forgiving yourself for the inevitable failures. A balance between the big four that creates a well-rounded life with no regrets.”
Alchemy: The Surprising Power of Ideas That Don’t Make Sense
I like this book simply because it leaves me thinking “Why didn’t I think of that?”
Rory Sutherland draws from his wonderful observation, knowledge in psychology, as well as an understanding of evolutionary theories to deliver a book pack full of deep insights and wisdom that explains why solving real-world problems psychologically can be cheaper and more effective than logical solutions.
Psychology is more than just a trick or magic, but a powerful way to solve problems that are often ignored in favor of rational, logical solutions. Sutherland provides many anecdotes, ideas and counterintuitive answers to why we brush our teeth, why bank branches have marble countertops, or how to reduce travel time without making the train go faster. These questions seem trivial but unveil deeper psychological reasons why things are the way they are.
I used to think that to succeed in life or at least in the stock market you need to be as rational as possible. I was wrong. At least that is only partially true. You need to have good self-control rather than letting emotions go rampant, of course. But when it comes to identifying investment ideas and figuring out a product or service’s value proposition, think less rationally. Because if you always see things from a rational lens, you are going to missed out the deeper psychological reasons why people own Ferrari, why do people buy an overpriced Dyson vacuum cleaner, why do people pay more for Starbucks coffee (or put their coffee in a Starbuck mug), or why do we fit ourselves in uncomfortable denim pants called jeans, together with the opportunities to invest in them. Eccentricity can give you an edge. An alchemy rule that’s worth thinking: Efficiency is a disadvantage when everyone wants to be efficient.
Here’s a thought from reading this book: Companies that sell products or services to solve problems psychologically are likely to have a strong moat, good margins, and high profitability.
Where Good Ideas Come From: The Seven Patterns of Innovation
Steve Johnson looks across many domains from biology, society, business, to information networks and ecosystems to understand the essence of creativity, how each domain finds solutions, and if any commonalities form the fabrics of innovation?
This book is similar to Antifragile in a way that all the concepts are applicable in life and in investing. It is as if you’ve been handed a box of colorful Lego blocks and the only limitation to creating something new is your imagination.
One can think of these seven patterns of innovation—the adjacent possible, liquid networks, the slow hunch, serendipity, error, exaptation, and platforms—as mental models. If you want to be more creative, be good at problem-solving, or develop second-level thinking, these seven models are your buffet. What if you want to improve your chances of finding new ideas in the stock market? You need liquid networks, serendipity, and platforms. Improve analytical skills? Try the adjacent possible, slow hunch, and error. If you want to understand (or find) disruptive technologies or companies, exaptation, error, and platforms are the DNA.
Here’s an example of how I use liquid networks to understand the idea of changing your mind. Liquid networks are a metaphorical way of saying liquid state (think water), as opposed to gaseous (vapor) or solid-state (ice-cube), is the ideal medium that produces good ideas. When scientists look for signs of life on other planets, the first question they ask is ‘Is there any water?’ Because water enables chemicals permutation that is essential to life existence.
Coming back to my example. We can think of liquid networks as a way to stay open-minded by allowing the exchange of diverse information. Having a strong conviction in the market, sticking to your belief can be an advantage when Mr. Market has gone maniac. But it can backfire as well when you refuse to change your mind even when there’s overwhelming evidence that you’re wrong. This is a mind in a solid-state. On the other hand, changing your mind as fast as the wind is a good thing when uncertainty is high but not sticking to an idea long enough means it’s hard to see profit. This is a mind in a gaseous state. So the happy medium is to stay in a liquid state of thinking. Strong conviction, weakly held. Always be ready to challenge your thinking and having the ability to hold two conflicting information in your mind.
Thinking in Systems
One of the books that I’ll turn towards for many years to come. I’ve talked about this book previously. If you want to understand the underlying structure that governs all system behaviors, why systems work so well, why they surprise us, this is the book.
Systems sound abstract but it is all around us. Your habits, relationships, company you work for, the sports games you watch, they are all systems. In the context of investing, why companies profits oscillate, the structure of growth, how excessive growth can destroy the structure that sustains it, why companies commit fraud, why some companies thrive while others don’t etc, they’re all systems and subsystems.
Thinking in systems is like looking at a skeleton watch. Besides the minute hand and hour hand moving on the surface, you also see all the inner workings, how the wheels, springs, levers, etc all work together to move those hands. Those components are the system structure of the watch that produces its behavior—the minute hand makes one revolution every hour while the hour hand makes two revolutions every 24 hours. And these behaviors produce a series of events over time—tells you what’s the time now.
Let’s bring this into the stock market. Things that you see in the market—daily news eager to grab your attention, prices moving up and down, exchange rate movements etc, these are events, just like the watch telling you the time. Events capture our attention but they’re also not the most important. As Donella Meadows wrote:
“Systems fool us by presenting themselves—or we fool ourselves by seeing the world—as a series of events. The daily news tells of elections, battles, political agreements, disasters, stock market booms or busts. Events can be spectacular: crashes, assassinations, great victories, terrible tragedies. They hook our emotions. Like the tip of an iceberg rising above the water, events are the most visible aspect of a larger complex—but not always the most important.
When a system thinker encounters a problem, the first thing he or she does is look for data, time graphs, the history of the system. That’s because long-term behavior provides clues to the underlying system structure. And structure is the key to understanding not just what is happening, but why.”
So when you can “see the world as a collection of feedback processes”, you’re less likely to get surprised or ask meaningless questions like “why did the market (or stock) go down?” And because the stock market is a complex system with many delayed feedback loops, being a system thinker also means you understand how a system structure produces system behavior, therefore you can anticipate or act early before a negative event occurs. As opposed to a linear thinker, which is terrible for an investor, you start to see things as a whole rather than breaking them into components, identify patterns rather than blaming or trying to fix the symptoms, and most important of all, you synthesize information instead of pure analysis.
Antifragile: Things That Gain from Disorder
While Taleb’s previous two books—Fooled by Randomness and The Black Swan—focused on overconfidence and underestimation of risk, Antifragile is the antidote on how we can reduce fragility and in the process, gain from disorder and randomness.
Antifragile provides a view that doing something supposedly harmful (not too much) can be beneficial. Here are some examples:
- An adequate amount of stress is productive.
- A controlled, localized forest burning reduces the chance of a full-scale firestorm.
- Some physical activities such as weight training increase old people’s lifespan.
- Exposing the body to a deadly virus like Measles can acquire life-long immunity.
- Allowing big banks to collapse is healthy for the overall financial system.
Take margin loan for example. It is a great way to magnify gains. But it increases fragility because when randomness is high, you are forced to cover your positions. And in most cases, you blow up overnight. What about cut-loss? Having a cut-loss point works in normal conditions. But under extreme conditions when the market collapses, any speculative position will put a hole in your portfolio because there isn’t any buy-side liquidity.
If you notice the examples above, it is all about understanding what’s the maximum risk, or the worst-case scenario. The reason is that finance and investing is non-ergodic. Or what I called don’t cross a river that’s average 4 ft. deep. Ole Peters, an External Professor at Santa Fe Institute, describes antifragility as a way to achieve more ergodicity. How do you do that? Taleb suggests a barbell investment strategy: 50% investment in a safe haven i.e low risk fixed investment such as bonds and the rest in high risk venture.
Now you don’t have to necessarily agree with Taleb but once you understand antifragility, it can be a very powerful thinking tool. You can start thinking about what aspects of your portfolio are fragile. What about companies? What kind of businesses are the most vulnerable when randomness is high? What about life? Do you have any habits that increase fragility? Can you change that?
Seth Klarman once said “Accepting that we cannot predict the future—i.e., that there will always be unexpected and highly consequential events—is the first step in becoming less fragile and more adaptable. People should be highly skeptical of anyone’s, including their own, ability to predict the future, and instead pursue strategies that can survive whatever may occur.”
Range: How Generalists Triumph in a Specialised World
I like this book because it is reminiscent of the foxes and the hedgehogs in Philip Tetlock’s book Superforecasting. The hedgehogs know one big thing while the foxes know many things. Foxes are generalists, like an army Swiss knife that can do multiple tasks. Robert Hagstrom called investing ‘The last liberal art’ because it requires a good understanding of a wide range of fields if one is to succeed. It is also what Charlie Munger called a latticework of mental models—having many tools in your toolbox to solve unique problems.
If you zoom out and look at the big picture, investing is about solving problems. We have to answer questions like “Can this stock continue growing?” What is the right price to pay? How will the industry dynamic affect the business? How much should I have this stock in my portfolio? etc.
In one of the studies, Epstein wrote: “successful problem solvers are more able to determine the deep structure of the problem before they proceed to match a strategy to it.” That’s another way of saying you need to understand the fundamentals and see the problem from many different perspectives.
We currently live in a wicked world. One that requires plenty of abstract thinking, thought experiment, learning without experience, and one that can only be achieved by studying broad concepts from many different domains. The business world is wicked. No two companies out there are alike. Each is unique in its way. Even those that succeed don’t use the same strategy or follow a specific path. When we encounter a situation we’ve never seen before, we tend to apply categorical thinking. We group companies by attributes such as a similar P/E ratio, by industry, and so on because it makes it easier for us to solve the problem. But an even better way is to apply abstract and analogical thinking.
“Breadth of training predicts breadth of transfer…the more contexts in which something is learned, the more the learner creates an abstract model, and the less they rely on a particular example. Learners become better at applying their knowledge to a situation they’ve never seen before, which is the essence of creativity.”
According to the Future of Jobs Report, the top 3 skills in 2020 are complex problem solving, critical thinking, and creativity. As we move towards industry 4.0—automation and data exchange in manufacturing technologies and processes, internet of things, artificial intelligence, learning to be like a fox becomes more of a necessity than a luxury.
Barking Up the Wrong Tree: The Surprising Science Behind Why Everything You Know About Success Is (Mostly) Wrong
I’ve been following Eric Barker’s blog for some time when he wrote this book. I wasn’t expecting much from this book, perhaps just a compilation of his blog posts. I was wrong. Barker has produced a well-researched book with amazing narratives on how to be successful.
Barker looks into what produces success by answering some perplexing questions we often encounter in life over a large variety of situations from career, relationship to finance and business. Should we play safe or risk it all? Do nice guys finish last? Do quitters never win or winners never quit? Is it what you know or more about who you know? Is it all about work or work-life balance? etc.
If you want a concise answer: it depends. Nothing is absolute in life. That is, what is the right decision to make often depends on the context of the situation. There is rarely ever a time where if A is good, doing A is good under all circumstances. Context matters because success cannot be condensed into a single formula. It is more about learning how to do the right thing at the right time. On top of these, know your strength, tell yourself a positive story, and practice self-compassion, these are the ingredients to a happy life.
Barker sums up what you need to do to succeed this way, “What’s the most important thing to remember when it comes to success? One word: alignment. Success is not the result of a single quality; it’s about alignment between who you are and where you choose to be. The right skill in the right role. A good person surrounded by other good people. A story that connects you with the world in a way that keeps you going. A network that helps you, and a job that leverages your natural introversion and extroversion. A level of confidence that keeps you going while learning and forgiving yourself for the inevitable failures. A balance between the big four that creates a well-rounded life with no regrets.”
Alchemy: The Surprising Power of Ideas That Don’t Make Sense
I like this book simply because it leaves me thinking “Why didn’t I think of that?”
Rory Sutherland draws from his wonderful observation, knowledge in psychology, as well as an understanding of evolutionary theories to deliver a book pack full of deep insights and wisdom that explains why solving real-world problems psychologically can be cheaper and more effective than logical solutions.
Psychology is more than just a trick or magic, but a powerful way to solve problems that are often ignored in favor of rational, logical solutions. Sutherland provides many anecdotes, ideas and counterintuitive answers to why we brush our teeth, why bank branches have marble countertops, or how to reduce travel time without making the train go faster. These questions seem trivial but unveil deeper psychological reasons why things are the way they are.
I used to think that to succeed in life or at least in the stock market you need to be as rational as possible. I was wrong. At least that is only partially true. You need to have good self-control rather than letting emotions go rampant, of course. But when it comes to identifying investment ideas and figuring out a product or service’s value proposition, think less rationally. Because if you always see things from a rational lens, you are going to missed out the deeper psychological reasons why people own Ferrari, why do people buy an overpriced Dyson vacuum cleaner, why do people pay more for Starbucks coffee (or put their coffee in a Starbuck mug), or why do we fit ourselves in uncomfortable denim pants called jeans, together with the opportunities to invest in them. Eccentricity can give you an edge. An alchemy rule that’s worth thinking: Efficiency is a disadvantage when everyone wants to be efficient.
Here’s a thought from reading this book: Companies that sell products or services to solve problems psychologically are likely to have a strong moat, good margins, and high profitability.
Where Good Ideas Come From: The Seven Patterns of Innovation
Steve Johnson looks across many domains from biology, society, business, to information networks and ecosystems to understand the essence of creativity, how each domain finds solutions, and if any commonalities form the fabrics of innovation?
This book is similar to Antifragile in a way that all the concepts are applicable in life and in investing. It is as if you’ve been handed a box of colorful Lego blocks and the only limitation to creating something new is your imagination.
One can think of these seven patterns of innovation—the adjacent possible, liquid networks, the slow hunch, serendipity, error, exaptation, and platforms—as mental models. If you want to be more creative, be good at problem-solving, or develop second-level thinking, these seven models are your buffet. What if you want to improve your chances of finding new ideas in the stock market? You need liquid networks, serendipity, and platforms. Improve analytical skills? Try the adjacent possible, slow hunch, and error. If you want to understand (or find) disruptive technologies or companies, exaptation, error, and platforms are the DNA.
Here’s an example of how I use liquid networks to understand the idea of changing your mind. Liquid networks are a metaphorical way of saying liquid state (think water), as opposed to gaseous (vapor) or solid-state (ice-cube), is the ideal medium that produces good ideas. When scientists look for signs of life on other planets, the first question they ask is ‘Is there any water?’ Because water enables chemicals permutation that is essential to life existence.
Coming back to my example. We can think of liquid networks as a way to stay open-minded by allowing the exchange of diverse information. Having a strong conviction in the market, sticking to your belief can be an advantage when Mr. Market has gone maniac. But it can backfire as well when you refuse to change your mind even when there’s overwhelming evidence that you’re wrong. This is a mind in a solid-state. On the other hand, changing your mind as fast as the wind is a good thing when uncertainty is high but not sticking to an idea long enough means it’s hard to see profit. This is a mind in a gaseous state. So the happy medium is to stay in a liquid state of thinking. Strong conviction, weakly held. Always be ready to challenge your thinking and having the ability to hold two conflicting information in your mind.
Thinking in Systems
One of the books that I’ll turn towards for many years to come. I’ve talked about this book previously. If you want to understand the underlying structure that governs all system behaviors, why systems work so well, why they surprise us, this is the book.
Systems sound abstract but it is all around us. Your habits, relationships, company you work for, the sports games you watch, they are all systems. In the context of investing, why companies profits oscillate, the structure of growth, how excessive growth can destroy the structure that sustains it, why companies commit fraud, why some companies thrive while others don’t etc, they’re all systems and subsystems.
Thinking in systems is like looking at a skeleton watch. Besides the minute hand and hour hand moving on the surface, you also see all the inner workings, how the wheels, springs, levers, etc all work together to move those hands. Those components are the system structure of the watch that produces its behavior—the minute hand makes one revolution every hour while the hour hand makes two revolutions every 24 hours. And these behaviors produce a series of events over time—tells you what’s the time now.
Let’s bring this into the stock market. Things that you see in the market—daily news eager to grab your attention, prices moving up and down, exchange rate movements etc, these are events, just like the watch telling you the time. Events capture our attention but they’re also not the most important. As Donella Meadows wrote:
“Systems fool us by presenting themselves—or we fool ourselves by seeing the world—as a series of events. The daily news tells of elections, battles, political agreements, disasters, stock market booms or busts. Events can be spectacular: crashes, assassinations, great victories, terrible tragedies. They hook our emotions. Like the tip of an iceberg rising above the water, events are the most visible aspect of a larger complex—but not always the most important.
When a system thinker encounters a problem, the first thing he or she does is look for data, time graphs, the history of the system. That’s because long-term behavior provides clues to the underlying system structure. And structure is the key to understanding not just what is happening, but why.”
So when you can “see the world as a collection of feedback processes”, you’re less likely to get surprised or ask meaningless questions like “why did the market (or stock) go down?” And because the stock market is a complex system with many delayed feedback loops, being a system thinker also means you understand how a system structure produces system behavior, therefore you can anticipate or act early before a negative event occurs. As opposed to a linear thinker, which is terrible for an investor, you start to see things as a whole rather than breaking them into components, identify patterns rather than blaming or trying to fix the symptoms, and most important of all, you synthesize information instead of pure analysis.
