In the world of investing the concept of volatility as a measure of risk is foolish. The entire investment world has been built around this concept and it’s ridiculous. Instead, the concept of anti-fragility as introduced by Nassim Nicholas Taleb in his seminal work, Antifragile: Things That Gain from Disorder, holds profound importance for investors.
Humans seek certainty. Academics have introduced the concept of volatility as defining uncertainty and therefore risk. We believe this is unwise. Volatility is a simple measure but doesn’t capture the essence of endurance. Taleb introduces the notion that certain systems "markets and businesses” not only withstand shocks and volatility but actually thrive and improve in the face of adversity. For high net worth individuals navigating the complex landscape of investments, understanding and harnessing the principles of anti-fragility should be the focus. It can be the differentiating factor between mere survival and sustained prosperity. In this vein volatility is a feature in financial markets rather than something to be feared.
Traditional investment strategies often focus on risk mitigation and stability, aiming to weather and when possible reduce volatility. However, Taleb argues that this approach overlooks a crucial aspect of resilience – the ability to benefit from disorder. Anti-fragile systems capitalize on volatility, uncertainty, and randomness, turning them into opportunities for growth and enrichment. As sophisticated investors, recognizing the value of this counterintuitive perspective can lead to more resilient portfolios capable of thriving in turbulent times.
Turbulent waters of Benham Falls just outside Bend, Oregon. Benham Falls. Taken on one of many family trips to Central Oregon over the years.
Others define value investing using various wide ranging and conveniently quantifiable measurements. It reminds me of a quote I heard from Howard Marks, “Not everything that can be measured matters and not everything that matters can be measured.” We think that there are a lot of important things that are difficult to measure that only experience and wisdom reveal. As such, we have a much narrower definition than is defined in the academic literature. It’s a strategy that Berkshire Hathaway, Fairfax Financial, and Markel have been practicing for decades. It’s why we own them. This is what we call value investing.
Embracing the principles of anti-fragility can serve as a model or guiding philosophy for navigating the unpredictable terrain of the financial markets. By recognizing volatility not as a threat to be avoided but as an opportunity to be leveraged, investors can cultivate portfolios that not only withstand shocks but emerge stronger from them. Taleb's insights remind us that in an uncertain world, the path to long-term prosperity lies not in futile attempts to predict the future, but in embracing uncertainty and harnessing its transformative power.