Swan Song: Why Nassim Taleb is Still Wrong

While for just about everyone involved in the markets the last two years of financial history have been a massacre, they have been a long victory lap for Nassim Nicholas Taleb. Taleb is the author of The Black Swan, the book about, as the subtitle puts it, "The Impact of the Highly Improbable." It came out in 2007, just before everything that seemed highly improbable became painfully actual. As everyone else's fortunes have shrunk, Taleb's have risen. Not only have his books made him the public face of the New Catastrophism, but his insights have turned out to be extremely profitable: The Wall Street Journal reports that Universa, a hedge fund for which Taleb serves as guru and adviser, gained more than 100 percent last year and now holds $6 billion.

It's hard to argue with success. In bubble markets and bear markets, the talk always turns to new paradigms. If there was a huge crash yesterday, why shouldn't there be an even bigger one tomorrow? For a while now, though, I've been trying to explain to people why I am loath to jump on the Taleb bandwagon. The news about Universa doesn't change this. I am not surprised that Taleb's approach has made money for investors. But I will be if—assuming he doesn't change his approach—he keeps doing so.

Taleb has become the go-to philosopher of the markets with a straightforward and appealing precept: that people always underestimate the chances of improbable, out-of-the-ordinary events. This to me seems a dangerous proposition about the markets. It is also, I think, a questionable proposition about human behavior.

While Taleb has acquired a huge following in the world of business and investment, he does not present himself mainly as a "business" thinker. Little of his 2004 book, Fooled by Randomness, and even less of The Black Swan talks about investing directly. His conceit is that he helps readers see possibility. It is attractive because it separates people into the plodders—or, as Taleb calls them, nerds—and the street-smart Talebites who've learned to appreciate the unexpected. But the closer you look, the less clear it is that the plodders are as consistently wrong as Taleb thinks.

One thing to be said in Taleb's favor is that he has never lost a spectacular amount of money at once. Three times now he has made money when few others did. The first was in the 1987 Black Monday stock market crash, when he made $35 million to $40 million as a trader. The second was the tech stock crash of 2000, when Taleb's own fund, Empirica, gained 60 percent. And the third is Universa.

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What you might miss in this, though, is what happened to Taleb in the in-between years. Taleb, in the pre-Universa days, said that his Black Monday windfall made up 97 percent of the money he'd made. Afterward, he moved through several trading jobs without much success. In 1999, he started Empirica, which, as the Wall Street Journal reported, followed the gains of 2000 with several lackluster years and closed in 2004. In Taleb's telling, this is part of the magic. "When you lose money steadily and then make money in lumps," Taleb told Bloomberg magazine, "people think you're crazy."

CONTINUED : Waiting around for the unexpected

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