Value investing is a marathon, not a sprint. The winner is not the one who gets the most percentage points per year (although that is nice), but to those who can survive anything. The game is not to become a winner, but to become the survivor.
As the saying goes:
The race is not to the swift, nor the battle to the strong; neither is the bread to the wise, nor the wealth to the intelligent, nor the favor to the skillful, but that is the way to bet.
There are more bull markets than bear markets. And there are long years when we experience prosperity of the bull market and sudden decline of crashes. In other words, there are more times that you can make money and only a few instances that you can lose it all.
Though the odds are asymmetrical – more odds of winning than chances of losing it all, that one small chance of going bankrupt in a crash is what matters most. You don’t want to be a victim of the crash. So what can you do?
Surviving the market crash is something a great investor should know how to do. Being aggressive in a bull market is one thing. Being defensive in a bear market is another thing. But an investor who is antifragile I think is a great one.
Nassim Taleb have this concept of Antifragility. There are things that breaks easily to chaos – fragile and there are things that don’t break easily or are resistant to chaos, we can say that the object is “hard” or resilient. But there’s no word to describe things that likes chaos and uncertainty. Those that likes disaster. So we call this antifragile.
How do you make yourself antifragile?
When your portfolio breaks at the first sign of a market crash, we can say that your portfolio is fragile. When it doesn’t move in either bull or bear markets, then your portfolio is hard or resilient (or perhaps a little too diversified?) when your portfolio went up when the market crashed, your portfolio is antifragile. A portfolio that likes disaster.
So how do we make a portfolio that likes disaster? Can we make our portfolio even slightly more conducive to a falling market?
The answer is yes. Your portfolio can either be 100% antifragile or a mix of everything else.
Optionality. A person that is antifragile have lots of options. Losing a job when the market crash can be considered a black swan event in the life of a single person. But if he’s antifragile, he can still make a living because he has “options”. A person with a job and a passive business that is not affected by a market crash can be considered an antifragile person. If he has a stash of cash on top of that, he is even more antifragile. He has a lot of options in his hands.
In a portfolio, you should have options if you want to be antifragile. That means, buying put options when they are dirt cheap, a few years before a market crash. Of course you don’t know that the market will crash. You just buy an option as an insurance, “just in case”.
In the Philippines, we don’t have any options market. But there is something better. CASH is an option. So if you have a lot of cash, and the market crashed, the value of your cash increases because of the amount of assets that you can buy for cheap. Its no wonder cash is king in times of turmoil. But in reality, options are king in times when other people have no choices.
How do we get more cash you say? Have a portion of your portfolio invested in high paying and growing dividend stocks. Learn how to invest in dividend paying stocks.
The disadvantage of having an antifragile portfolio
We know that the advantage of an antifragile portfolio is, it goes up when the market goes down (or black swan events). But there’s some catch to it.
A 100% antifragile portfolio will lose a little bit of money every year in a bull market. Because you are buying options, which is a recurring expense, you lose money when those options expire. Or put in another context if you use cash instead of options, you lose money through inflation when you use cash as an option. In a bull market, you lose money, but you accumulate cash, right until the next market crash where you make a killing.
This has been one of the strategies of the great value investors like Warren Buffett. And one of the reason why I always keep cash. Does having $130 billion in cash sounds familiar to you? Warren has an antifragile portfolio.
You will lose a bit of money here an there when you use cash as an option. But the reward is worth it when the black swan does come. Its not for everybody. Some people don’t want to be left out of the bull market. So some people opt to invest the antifragile way with only a percentage of their funds.
The best advantage of being antifragile
If you follow the antifragile way, there is one great benefit that you could get. And that is, you don’t have to be a genius at investing if you become antifragile. You don’t have to have accurate insight into the future. You can invest after the fact and act accordingly. If a market crashed and you have all this cash piled up because you built your options, you don’t have to be a genius to know the next best move. Any move you make is a good move. And that I think is the best.