My wife and I had an excellent vacation in a small but luxurious hotel right on the sea. I used the long walks along the coast or the time at the pool to think, read and relax. During my stay, and sometimes somewhat tipsy (thanks to Mr. Lagavulin), I have summarized some thoughts. These thoughts were mainly about frugalism, hedonism, and antifragility. In this article, I share some of them on antifragility.
Antifragility – when robust is not enough
Antifragility is a condition, a state like cold, warm, big, small, etc. But the word is, at the same time, a neologism that describes the sum of several attributes.
The term is an invention of Nassim Nicholas Taleb and means the opposite of fragile. While fragility is characterized by something being broken and damaged by a disturbance, antifragility is a quality where something becomes even stronger and more agile as a result of a disorder, disruption or resistance.
So antifragility is more than robustness. Whenever you talk to Mr. Taleb, make sure you never use the word robust to describe antifragility. Something robust does not take damage, but it does not profit from a disturbance either. Just remember: benefiting from disorder is the crucial point for antifragility.
Wealth management and antifragility
So if I could choose a model for how I want to manage my wealth, I would always choose an antifragile model.
Fragile is bad. I want to maintain the value of my assets and, at best, increase it. No matter how much profit a fragile model brings in average years, in a crisis, where it is challenged, I will probably not succeed with a fragile model.
Robustness is good. It could secure my existing assets. But in a crisis, I would not benefit. So this is where antifragility gets my attention. I want a wealth management model that increases the value of my assets in times of crisis.
Antifragility is the holy grail.
Are equities antifragile?
Stocks are an essential part of many people’s wealth management. But stocks are not antifragile in many ways.
First of all, they are neutral at best. Stocks are just shareholdings in companies that come with a changing price tag. These shares are inseparably linked to the underlying business of the respective company. Therefore, the decisive factor is whether or not the company and its business model in question are antifragile.
Secondly, stocks or the underlying business do not necessarily benefit from crises. During the coronavirus pandemic, some companies benefited immensely from the disturbances and challenges that the pandemic brought to the business and corporate world. But other companies, such as event promoters, restaurant operators, and travel companies, suffered severely.
Furthermore, shareholders usually have no influence. This affects both the business and the share price. A company can generate increasing profits for years, and yet its share price may fall. A new CEO can quickly lead a well-run business into choppy waters.
Additionally, a portfolio of many stocks can generate cannibalization effects of returns. Stocks that perform well in specific economic cycles run the risk of performing poorly in other phases. With countercyclical stocks, the opposite is true. Therefore, a diversified portfolio may lead to robustness but not to antifragility.
So overall, and from an investor’s perspective, stocks are not antifragile. They tend to lose value in the face of obstacles, lousy sentiment, and negative news.
Serendipity and antifragility
Cannibalization effects in the context of a diversified portfolio should not hide the fact that the principle of serendipity is also relevant in wealth management.
A small aspect of serendipity is already evident in the diversification of one’s portfolio. I can go through life open and observant and put my money on as many good cards or ideas as possible. And yes, it is unlikely to collect all the Apples, Amazons, etc., at the time of their IPO and hold them for life. But that is not the point. It’s about creating more and more opportunities without ending previous opportunities.
This brings us very close to serendipity. It describes the phenomenon that we often make valuable discoveries unintentionally. Sure, those who lie on the couch and write catty Twitter tweets won’t be able to enjoy the outcome of this phenomenon.
Antifragility and serendipity are linked. Going through the world with an open heart and awake mind will confront us with many conflicts and challenges.
But we will grow from them. We will learn, make new friends, get further input, and so on. These challenges are essential for proper wealth management. They will keep me from perishing miserably in my logical fallacies and filter bubble.
A job as a lawyer in large law firms brings antifragility
There is always a particular pattern among the large Anglo-American law firms at times of crisis.
First, all the firms go into a wild panic mode. Always. They cut costs, stop the payout of bonuses, and suspend regular salary increases. Sometimes, they even cut salaries for a few months, which was the case during the great financial crisis and at the beginning of the corona pandemic.
Then law firms realize that there is never a shortage of legal problems, even in the worst crisis. They notice it because they are drowning in work. And first, they drown in work and then in money. At the end of this pattern, there are bonuses and massive salary increases.
Yes, I am biased. But if there is one profession that is antifragile, it is the legal profession.
Common misconceptions: things that aren’t antifragile
There are many misconceptions about what is and is not antifragile. A first misunderstanding is already to confuse antifragility with robustness. As a lawyer, I not only keep my job in times of crisis (that would only indicate robustness), I can even count on my industry reaching a new growth and profitability level. That’s antifragility. But there are more misunderstandings, where people are not even aware of the fragility of things.
Employee stock ownership plans (ESOPs)
Especially among liberals, the insane idea of so-called employee stock ownership plans (ESOPs) is widespread. ESOPs are supposed to increase the motivation of employees and, at the same time, contribute to retirement savings.
This idea is fragile to the highest degree. If the company goes bankrupt due to a CEO who is addicted to prestige, the hard-working employee loses not only his job but also his savings for retirement. The employee’s financial affairs would gain some robustness if, instead of investing in his own company, he invested in the largest competitor or spread the money even further (keyword serendipity). But reasoning with liberals can be difficult.
Multiple passive income streams for the sake of multiple passive income streams
Another misconception is that trying to build as many passive income streams as possible is a good thing. This approach has little to do with serendipity. The obsessive attempt to build up many sources of income does not simply want to create opportunities and see what happens, but to build up targeted sources of income and see what happens.
That’s a subtle difference because part of serendipity is that success and happiness can’t be planned. If I can do many things a little bit, I am probably not good at anything. Therefore, I prefer to focus on increasing my market value in the areas where I am skilled – for example, in an antifragile professional environment like that of a lawyer :).
By the way: thinking is the most antifragile thing I know
Probably the most antifragile institution I know is the process of thinking. Thinking is geared toward being challenged. It wants to be falsified. Thinking benefits from disruption and disorder. Because it can change wrong thinking processes to right thinking processes. It is mobile and flexible. This is a decisive advantage for evolutionary survival mechanisms.
In this respect, I am happy when I realize that I was wrong or mistaken somewhere. Progress for me is the falsification of my thinking. Here, to be open to possible errors of one’s thinking is the first condition for antifragility.