On June 28th, 1997, just seven months after shocking the boxing world by defeating Mike Tyson by TKO in the 11th round, Evander Holyfield was back in Las Vegas to defend his title in one of most anticipated rematches in boxing history. Holyfield was a hugely experienced fighter and a meticulous trainer and in preparation for the fight, his team analyzed virtually every element of Tyson’s style and developed a grueling training program and a brilliant fight plan. He was never more prepared, but the smart-money oddsmakers in Vegas saw things different, predicting a Tyson win at 4:1 odds.
But sometimes, shit just gets crazy, and when it does, you can throw away the fucking odds, because some shit is just too un-real to predict. Until it happens.
With 40 seconds remaining in the third round, while brawling through through an ugly clinch against the ropes, Tyson shoves his head across Holyfield’s face and bites an inch-long chunk of cartilage from the top of Holyfield’s right ear. Then, after all hell breaks loose, the round is allowed to resume, and fuck me, Tyson bites Holyfield’s left ear. One-two, right-left, fast and precise, but with teeth.
For the bookmakers, or anyone in the fight game, this was what you might call a black swan event, which is basically some crazy-ass unpredictable shit that happens from time to time, usually with extreme consequences. And it was unpredictable because the fight game is complex and even the most elite trainers and bookmakers know that they can’t know everything. Biting? Fuck, who knew? So they calculated odds on what they know, constructing probability models that work until they don’t work, at which point they change the model. The odds are always a guess, until they guess wrong. Then they know with certainty they got it wrong.
Ok, here’s the thing: in a market full of guessers with models, certainty is money. In fact, in a market like that, you can make fuck-you money trading certainty with options with almost no chance of big losses. I mean, you could, but I doubt you will. Because what you believe is way more powerful than what you know. But this dude did….
Nassim Nicholas Taleb is not your typical money hustler. He’s a master options trader, a PHD thinker/lecturer, a best-selling author who speaks more than 10 languages, and he dead-lifts a respectable multiple of his body weight. Taleb was born in 1960 to an affluent and highly educated family in Lebanon. For thousands of years, Lebanon was like the Santa Monica of the ancient world — culturally diverse and socially tolerant, with beaches and sunshine, good-ass food and beautiful women, and that smug vibe of people with tanned skin and disposable income. But 1975, Civil War broke out and all that went to shit. Taleb quickly realized that like all big events in history, no one saw it coming and no one knew how long it would last. Opinions formed and ideologies crystallized and the explanations were mostly bullshit, crafted to exploit an agenda that never squared with reality. So after spending his teens in wartime, Taleb bounced, first to Paris, where he earned his BS and MS, and then to Pennsylvania to attend Wharton.
At Wharton, Taleb developed an interest in probabilities and rare events and he begin to find flaws in the lab-coat Ivy League probability models of the day. In a nutshell, Taleb concluded that we are not wired for facts, we are wired for survival. Anatomically moderns humans have wondered the earth for over 200,000 years and to survive in the wilderness our ancestors really only needed food and drink and sex (and a bit of luck), so our brains evolved to really want those things and ignore the shit we can’t control. We seek pleasure for the shit that we need to survive, and we make simple mental notes to explain how we find it. We tell ourselves the stories that make us happy. All that one-off apocalyptic black swan risk didn’t really register with our ancestors since they couldn’t do shit about it except flight or flee. We are pleasure seeking cavemen storytellers in an infinitely complex world, and certainty never got anyone laid.
After graduating from Wharton Taleb headed to Wall Street, and in 1985, he lands a job as a derivatives trader for Credit Suisse. And fuck, 1985 was one good-ass time to be hustling money. The market was on a tear, trading at all-time highs. In fact, in the two years after Taleb joined Credit Suisse, the DJIA more than doubled, and there was no end in sight. Investors were in love with the market story which meant that volatility was non-existent and risk was mis-priced so Taleb loads up on cheap-ass out-of-the-money puts, mainly in foreign currencies, many of which were priced over 20 standard deviations OTM. People laughed at him. But at 20 standard deviations OTM, the decay was 67,000 months which he had no problem covering. He could afford to wait, and although there was no chance he would sell that shit for small profits, it couldn’t go much lower so he would never take a big loss. And if some crazy-ass black swan shit were to happen, well fuck..
On October 19th, 1987, in what became known as Black Monday, the DJIA fell by 22.6%, the largest single-day percentage drop in history. According to a Securities and Exchange Commission study, the crash was caused by traders fears over the impact of an anti-takeover bill that was moving through congress. Which is total bullshit. No one ever knows what exactly causes a crash and almost no sees it coming. On the Friday before the crash everyone had it right, and then on Monday everyone had it wrong. I searched, nothing much happened that weekend. And while traders covered and hedge funds unhedged, Talib sold. His long position in euro dollar options gained 67,000%. He would set a price on the phone and in the seconds it took the order to reach the pit and trade hands the price went parabolic as failed hedgies tried to salvage what was left of their investors’ money. Taleb had so many OTM Deutsche Mark options it took him a week to go delta neutral. “I learned two things — the market could deliver these crazy events and people didn’t understand the payoff.”
In the aftermath of the Black Monday slaughter and flush with fuck-you money, Taleb quit his job at Credit Suisse and returned to school to earn a PHD. But he stayed in the game, knowing that not-knowing paid like a motherfucker when the knowers became convinced they knew. During the financial crises of 2007 and 2009, Universa Partners, a tail-risk hedge fund Taleb advises, gained over 100%. In 2015, when some other unknowable shit happened, Universa made $1B.
To ignore the story and bet on certainty is really fucking hard, because the stories just keep getting better and better. I mean, in 1987, stocks were listed in newspapers. Boring. But then came the Riding Sun-era Nikkei, back when the Imperial Palace in Tokyo was worth more than all the real estate in California. Then Webvan and eyeballs and all that gen-X burning man shit, and then Commodities, and then the Yuan and whatever the fuck Peter Shiff keeps goin on about, then housing prices that can’t go down. Fuck, is there any question that a properly diversified low-cost passive large-cap S&P index negative interest-rate everything bubble is the shit? The shit may be a guess, but it’s back-tested. I mean, not for 200,000 years, but whatever.
Peace!
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