Accepting that we cannot predict the future – i.e., that there will always be unexpected and highly consequential events – is the first step in becoming less fragile and more adaptable. People should be highly skeptical of anyone’s, including their own, ability to predict the future, and instead pursue strategies that can survive whatever may occur. Taleb advises us to be “antifragile”– i.e., to embrace those elements that benefit from volatility, variability, stress, and disorder. This is exactly what we strive to do at Baupost, and Taleb has coined a name for it. The world will always deliver surprises coming from left field, things that have never happened before or, at least, that no one can remember having happened. As Nobel Laureate Daniel Kahneman notes, people tend to underestimate the odds of extreme events that haven’t occurred recently. It’s a tendency known as availability bias. This tendency is crucial to effectively position ourselves to survive and even thrive regardless of an uncertain future. How do we do that? By eschewing portfolio leverage, keeping ample cash balances ready for rapid deployment, pursuing a mostly generalist and flexible approach while avoiding narrow silos, seeking bargain-priced investments where possible adverse developments are already priced in, holding numerous investments with uncorrelated catalysts to drive outcomes irrespective of market levels, maintaining prudent diversification, demanding high intellectual honesty while consistently striving to improve, and having clients whose long-term orientation matches our own.
In the financial markets, there is rarely anything new under the sun, but you can never say you’ve seen it all, and what you thought you would never see can clobber you.
We make no heroic assumptions in our analysis, hoping, instead, that by compounding multiple conservative assumptions, we will create such a substantial margin-of-safety that a lot can go wrong without impairing our capital much or even at all. We never invest just to invest and don’t bet blindly on mean reversion or on historical relationships holding up. Our settings are permanently turned to “risk-off”.
