Making Equity Antifragile

Yeps, Taleb’s the famous one. 

Moi, je ne suis pas célèbre.

Néanmoins, j’aime le terme “antifragile” de Taleb.

Also, Taleb has termed equity as robust.

I do equity. 

I’d like my interaction and future with equity to be antifragile.

Let’s first look at Taleb’s definition for antifragile.

He says that anything that has more upside than downside from random events (or certain shocks), is antifragile; the reverse is fragile.

Robust equity will eventually crack when subjected to shock.

We are aware of that.

What do we do now?

Firstly, we take time, and put it in infinity mode. Meaning, that we stay invested, for a long, long, long time. 

We’re now allowing equity amply sufficient time to recover from not one shock, but many shocks.

Also, each time there is a shock, and equity tanks, we go in and buy some more.

How can we do this?

We are sufficiently liquid, all the time

Our small entry quantum approach is ensuring that. 

Also, we’ve chosen such equity first-up that is minimally susceptible to cracking. That’s the best we can do. 

We have either avoided debt altogether or chosen debt-levels that are adding value to the stock and can be easily taken care of in the short-term

We have chosen equity with decent quick and current ratios

We have chosen adaptable managements that function as optimal human capital, fighting inflation, showering shareholder-friendliness and adding value at all times

However, crack they do, eventually, and we keep picking up more. 

Since we’ve kept ourselves “infinitely” liquid as per our small entry quantum approach, we are then also “infinitely”poised to benefit from the cracks

As we keep getting more and more opportunities to buy with meaningful margins of safety, markets show us more upside than downside

Thus, antifragility comes to us as a function of falling price, given that the underlying has sound fundamentals, low to nil debt and benevolent, versatile and diligent management

Now, let the shocks come. 

In fact, let 20 shocks come. 

We want shocks to come…

…so that we can continue to buy at rock-bottom prices, which work in an antifragile manner for us, because of the characteristics of the equity and management we have chosen

Profiting from shocks?

More upside than downside? Owing to the effects of a shock?

What kind of behaviour is that?

That’s antifragile behaviour.

Advertisements

What is an Antifragile approach to Equity?

Taleb’s term “antifragile” is here to stay.

If my understanding is correct, an asset class that shows more upside than downside upon the onset of shock in this age of shocks – is termed as antifragile.

So what’s going to happen to us Equity people?

Is Equity a fragile asset class?

Let’s turn above question upon its head.

What about our approach?

Yes, our approach can make Equity antifragile for us.

We don’t need to pack our bags and switch to another asset class.

We just approach Equity in an antifragile fashion. Period.

Well, aren’t we already? Margin of safety and all that.

Sure. We’ll just refine what we’ve already got, add a bit of stuff, and come out with the antifragile strategy.

So, quality.

Management.

Applicability to the times.

Scalability.

Value.

Fundamentals.

Blah blah blah.

You’ve done all your research.

You’ve found a plum stock.

You’re getting margin of safety.

Lovely.

What’s missing?

Entry.

Right.

You don’t enter with a bang.

You enter at various times, again and again, in small quanta.

What are these times?

You enter in the aftermath of shocks.

There will be many shocks.

This is the age of shocks.

You enter when the stock is at its antifragile-most. For that time period. It is showing maximal upside. Minimal downside. Fundamentals are plum. Shock’s beaten it down. You enter, slightly. Put yourself in a position to enter many, many times, over many years, upon shock after shock. This automatically means that entry quantum is small. This also means you’re doing an SIP where the S stands for your own system (with the I being for investment and the P for plan).

Now let’s fine-fine-tune.

Don’t put more than 0.5% of your networth into any one stock, ever. Adjust this figure for yourself. Then adjust entry quantum for yourself.

Don’t enter into more than 20-30 stocks. Again, adjust to comfort level.

Remain doable.

If you’re full up, and something comes along which you need to enter at all costs, discard a stock you’re liking the least.

Have your focus-diversified portfolio (FDP) going on the side, apart from Equity.

Congratulations, you just made Equity antifragile for yourself.

🙂