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Anti-Fragility and The Barbell Approach to Personal Finance

Anti-Fragility and The Barbell Approach to Personal Finance

This week's article is a little deeper and more philosophical than most of what I write.  The source material comes from a book I recently finished titled Anti-Fragile:  Things That Gain From Disorder by Nassim Nicholas Taleb.  You may know his other work - Fooled by Randomness - more than this title.  To say Mr. Taleb is well-read, philosophical, and a renaissance man would be an understatement.

Background

Anti-Fragile takes a good bit pf perseverance to get through - or at least it did for me.  To fully inculcate the book's lessons, one must navigate a smattering of things, including references to Dostoyevsky and allusions to Mr. Taleb's fictional "Fat Tony".  Nevertheless, with a little effort, one can garner significant lessons from the book.  And with further secondary effort, apply these lessons to one's own craft...some of the lessons have near universal applicability - in my view. 

Definitions


Fragility.  Fragile is an easy word to both envision and define.  And we can easily provide examples.  Systems with single points of failure such as a parachutist jumping without a reserve chute.  Or, an over-zealous "helicopter" parent doing everything for his child and "snowplowing" away all potential roadblocks in life.  In my world - personal financial planning - fragility is something we look to avoid.  I have written about this topic - unaware at the time - in my writings about the 7 Cornerstones of Personal Finance and my various writings about Emergency Funds here, here, and here.

Anti-Fragility.  As Mr. Taleb writes it, there "is no word for the exact opposite of fragile".  The phenomena shares the - among others - the following characteristics:

  • Robustness - thriving and surviving amongst disorder and stress
  • Resiliency - remaining the same or improving in the face of shocks to the system
  • An ability to thrive in the face of randomness

I am summarizing a bit here...remember, this is a 500+ page book I am referencing.

Examples

I think two examples will better illustrate the concept of anti-fragility.

Restaurants.  Any single restaurant is a monumental risk for the person (or people) who open it.  In order to open a restaurant, one must tackle the following:

  • Real Estate selection;
  • Financing;
  • Purchasing (equipment is not cheap)
  • Staffing;
  • Construction; and
  • A whole host of other unanticipated things. 

Trust me, opening a restaurant is a herculean endeavor.  Moreover, a considerable amount of money must necessarily be invested prior to the first sale ever being made.  And finally, once the doors open, the owner is under constant assault from similar proprietors seeking an ever larger share of the collective "stomach". 

Despite these obstacles, numerous restaurateurs - both experienced and novice - seek to open ever more places for us to consume food.  It is because of this ubiquity of offerings that the restaurant industry as a whole is "Anti-Fragile".  Conversely, any individual restaurant owner is in a very fragile position.  More simply put, society will never not have a place to go out to eat, while restaurant owners are in danger of extinction every day.

Carrier Aviation.  For Navy Pilots, the demarkation line separating us from all others is the ability to land on "the boat".  There are few other feats in aviation more unique or more difficult.  When you start to learn how to land on the boat, the circumstances are generally sterile - daylight, ideal conditions, simulated at the field - you get the idea.  By Mr. Taleb's definition, this is a Fragile situation.  As carrier training progresses, less-ideal circumstances are unavoidable - foul weather, night time, lower fuel states. 

Ultimately - believe it or not - Navy Pilots make their first landings on the carrier flying alone...we don't want fragile pilots being coached by an instructor pilot coming aboard the boat.  Rather, we want durable, confident, and capable aviators landing on the ship.  Moreover, as training progresses, the end result is an Air Wing who can collectively operate day or night in all-weather situations.  I speak from experience....I have seen the normally rectangular landing area turn square when illuminated during night pitching deck conditions.  Naval Aviation - by Mr. Taleb's definition - is exceptionally Anti-Fragile.

The Barbell Approach

In finance - as it relates to investments - a Barbell Strategy is an approach to fixed-income investments where an investor buys short-term and long-term securities while avoiding those of intermediate duration.  This approach is successful in rising interest rate environments where the expiring long-tailed instruments can be re-invested at the new - and rising - short-term interest rates.  The short and long-term buying is analogous to a barbell shape.

This concept is also applicable in other examples:

  • Side Hustles.  Think about someone with a steady job - pick your favorite guaranteed, middling paying job.  In addition, this same person pursues ventures outside of guaranteed job to produce additional income.  
  • Indulging.  Most people know that drinking alcohol leads to poor health in the extreme.  Therefore, those looking to manage the downside of over-consumption will abstain most of the time and drink only infrequently...few people drink in equal moderation every day, though I admit there are more than a few.

There are other examples, though the concept remains the same:  establish a baseline of certainty that is as immune from failure as you can make it.  Then, with excess resources beyond what is required to keep you safe, step out on the risk curve in order to garner more utility for yourself.  The idea is to avoid the tepid middle, so aptly described by President Theodore Roosevelt as the "gray twilight" occupied by those "who neither enjoy nor suffer much".

Applications to Personal Finances

There is much anyone can garner from Mr. Taleb's book about many financial topics.  For personal finance, I think the most cogent is using a Barbell Approach to make one's own finances Anti-Fragile.  Meaning, set initial goals whose end-state results in a financial structure making you and your family as impervious as possible to financial calamity.  As previously described, here are the Seven Cornerstones:

  1. Have an Estate Plan
  2. Establish an Emergency Fund
  3. Mitigate any potential damaging financial risks with insurance
  4. Have enough cash on-hand to pay current taxes due
  5. Have an Executable Budget
  6. Contribute to your Employer Retirement Account
  7. Address your Long-Term Care Needs

While this list is indeed not exhaustive for everyone, it is most definitely a great start for anyone towards an Anti-Fragile financial posture.  True, there are shocks that will wreck anyone financially.  This is why we must always be diligent in recognizing those potentialities before they manifest into something economically destructive.  No matter what the future holds, if you do these seven things, you will have formed the near-end of your personal barbell and can step out on the risk curve in forming the other half of the barbell.

Retired Military Members

In my view, the typical military retiree is financially trending toward Anti-fragility.  For most all military retirees, the following have inured in their favor:

  1. Pension – no mystery here – someone retiring from Active Duty is entitled to an immediately-vested Defined-Benefit Pension that is inflation-adjusted for life.
  2. Tricare for Retirees – prior to age 65, military Retirees enjoy their choice of Tricare Select or Tricare Prime, both of which have an annual maximum out-of-pocket expense of $3,000.  After 65, enrollment in Medicare is mandatory (Check the expiration date of your ID Card, which is a not-so-gentle reminder) and Tricare For Life benefit kick-in.  I’m simplifying somewhat in the interest of space.
  3. VA Disability – every Military Retiree should go through his/her respective VA Disability rating process.  These benefits are tax-free and inflation-adjusted for life…a doubly great benefit.
  4. Commissary and Exchange (BX) Privileges – self-explanatory
  5. Ancillary Benefits – Air Mobility Command privileges; military preferenced hiring for U.S. Government Jobs;

Having this set of resources at one's disposal affords opportunities unavailable to most others.  Indeed, a great number of military retirees have to option of doing anything or nothing....this is an enviable - and deserved -situation.  Therefore, it is advisable to take advantage of these opportunities to achieve one's goal on his/her own terms.

Look for Asymmetric Opportunities

If I were to offer you the chance to put up $10 for a 50% to win $100 with the only downside being the loss of your $10, you - of course - would be a fool not to take that deal.  This is what is known as an asymmetric bet.  Meaning, you stand to gain far more than you can lose.  Casinos, naturally (and profitably), play this game in reverse...they would offer you the same $10 bet, though only less than a 10% chance of winning - the difference being the "vig".  Casinos don't want asymmetric bets.  Rather, they want a steady homogeneous series of bets where they hold the advantage.  Even a small advantage, like the Pass Line at the Casino Craps Table can add up over time.  These winning bets brought us what it today Las Vegas.

For the rest of us, asymmetric bets are opportunities to earn outsized returns on our investments.  While these types of deals don't come along all the time, a more modest asymmetric opportunity is available on most days of the year - the stock market.  There are few other places on earth where one can easily and simply put money to work into endeavors with a positive expected value.  Over longer time horizons, the asymmetric opportunity is ever higher....this is why Financial Planners like me encourage savings early and often.  Indeed, your time "in the market" is one of the largest contributors to your ending account values.

Contrast the stock market to the restaurant "opportunity" I described above, which typically employs ample amounts of leverage (borrowed funds).  With the unlevered stock market investment, one can only lose what he puts up to buy his shares.  With a restaurant, sadly, you can indeed lose more than your initial investment sometimes.

There are other asymmetric opportunities in life - not everything revolves around the stock market.  For example, one could interpret a successful marriage as such an asymmetry.  This, however, is a BOLG about Personal Finance, so I will stick to the money stuff.  Rest assured, asymmetric bets similar to the $10 wager I described abound in the world, you just have to keep your eyes open and you will find them.

Conclusion

My hope is that you come away from this article with an appreciation for how important is it to develop a fortress-like structure when it comes to your personal finances.  It does not have to happen today...simply put one foot in front of the other and before you know it, the granite pieces will fall into place.  Once built, a fortress is not easily demolished, which will afford you and your family the opportunities to live your best life.  Plus, it is an exciting ride building your own unique financial fortress.

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