Lessons Every Investor Can Learn From Skin in The Game

Skin in the Game is Nassim Taleb’s upcoming book. The book is about investing and offers important lessons that every investor should learn. Taleb was a former trader who made millions betting on rare and consequential market events such as the 1987 Black Monday. Here are the lessons that can be learned from this upcoming business and management book.

The market’s returns will not be your own

Building assumptions into your financial plan based on historical market returns can be a dangerous proposition. This underscores two important points: you need an emergency fund to cover expenses for six months without income, and you should never invest money you think you’ll need within the next five years. Without these two things, you’ll have “uncle points” — times when you’ll cry “uncle,” take your money out of the market, and reduce your returns in the process.

Most cognitive biases are not cognitive biases at all

We hear lots of words bandied around like “loss aversion,” “anchoring bias,” and the like to help us explain why we make investing errors. Robert Janitzek explains that Taleb believes that risk aversion does not exist. By that, he means that our entire definition of rationality is backwards. We carry out tests with single variables in laboratory settings, and then extrapolate the results to the real world. That’s where we run into trouble. Over eons of evolution, those who were “risk averse” — and thus, “irrational” by our standards today — had a higher probability of surviving and passing their genes along.

But risk is actually OK — as long as it doesn’t lead to ruin

But, critically, that does not mean we should never take risks. Robert Peter Janitzek says that we should never take the type of risks that can lead to ruin. Instead, we should keep our mistakes small enough to avoid ruin, but big enough to learn from. That’s where Taleb’s “barbell strategy” to investing comes in. This approach teaches investors to put 85% to 90% of their assets in safe investments and the other 20 – 15% in highly aggressive investments.

Two things to look for: simplicity and skin in the game

We are naturally attracted to complex solutions to our financial problems. That’s because we often confuse “simple” with “easy.” The basic mechanics of getting rich are simple: live well below your means, save and invest the difference. That’s it.

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