Nassim Taleb Investment Philosophy: 200% Gains in 9 Days

3 Shares

Years ago I read a book by Nassim Taleb that talked about his very unique investing philosophy. I was intrigued, but afraid to take action. Recently, I watched a movie that prompted me to start a small experiment using a philosophy borrowed from Taleb and The Big Short.

Gains in excess of 100% and 200% ensued.

(Nassim Taleb talking to someone other than me. P.S. He doesn’t know I exist.)

Nassim Taleb Investment Philosophy

Some Background

Ever since I read Nassim Taleb’s book Fooled by Randomness, I’ve been really intrigued by his investing philosophy.

For those unfamiliar, Taleb made an incredible sum of money by making very small investments in hopes of some extreme event. Basically, he would buy way out of the money options at very low prices.

If no extreme event ever happened, then he would experience a small loss. If an extreme event indeed took place that caused extreme reactions in the stock market; his investment would experience extraordinary gains.

(What I imagine when I think of extraordinary gains.)

I believe he hit his jackpot with the flash crash of 1987. Please correct me if I’m wrong.

The main point is that this approach has always intrigued me. That said, I’ve never cared to try it out because it still seemed like it was playing too much to luck or chance. After all, how many times can you make a small losing investment before they add up to significant investment losses? What if I run out of money before an extreme event takes place?

Recent Catalyst

I haven’t thought about this investing approach much until recently when I watched the movie The Big Short. In the movie, there are two key characters who used a very similar investing approach as Taleb. They would place very small investments on events that the market viewed as extremely unlikely to happen. If they’re wrong, they lost small. If they’re right, they won big. Apparently, they used this method to turn $110,000 into around $30 million in just a few years.

(Shipley and Geller thinking about how to make more that $30 million from The Big Short.)

Needless to say, this got my attention.

What if I could identify high conviction opportunities that the stock market believed were very unlikely to happen?

My Great Experiment

I decided to test my theory. On May 27 of this year I purchased September $31 call options on $GDX. Thanks to an investment service I’ve been following, I felt there was a reasonable chance that the $GDX could climb into the mid-30s fairly quickly.

I tested the theory again on June 7 of this year when $VXX fell below $13. In my opinion, these were extreme lows and there were a multitude of events that could cause notable market volatility in the next few months. In addition, in the past year, the $VXX jumped to close to $30 twice so I knew it was not an extraordinary assumption. I decided to take a chance and purchased September $18 call options and December $19 call options.

At the time of writing, the $GDX options are up 182.77% in less than 20 days and the $VXX options are up 224.35% and 140.76% respectively in around 9 days. All this and neither have even come close to my initial price targets. I’ve locked in gains on a few of the options to protect my original capital and plan to let the rest of them ride.

I want to make something very clear at this point, the size of these investments was very, very small. I viewed this as an experiment and was not willing to jeopardize much capital on it. Please don’t try this at home unless you have suitable experience with options and are okay losing your entire investment because there is a high likelihood you will. Over time, I intend to continue this experiment and potentially increase its size and scope. Be sure to sign-up for updates.

I look forward to hearing your thoughts.

Brian

I’d like to see more content like this!