Nassim Taleb is a Lebanese American math genuis who understands the concepts of randomness, probability, and what he calls fragility, and can clearly communicate them to those who don’t.
His family was politically prominent and wealthy until the 1975 Lebanese Civil War, at which point he moved to the U.S. where he became a famed economic theorist and options trader.
So, how did Nassim Taleb make his money?
He’s one of the investors who accurately predicted both the 1987 market crash, dotcom tech bubble, and late 2000s financial crisis. He’s also a successful scholar, academic, and writer who published a series of books detailing his theories on optionality, fragility and economics.
Black Swan is one of his most successful, a New York Times Bestseller translated into 31 languages and predicting the 2008 banking crisis a year before it happened. That put it front and center on everyone’s minds when the market followed the pattern.
How Nassim Taleb Got Started
Taleb was born in Lebanon to a physician mother and anthropologist father. He attended French school there until university, which he attended in Paris before obtaining his MBA from Wharton School of the University of Pennsylvania and a PhD from University of Paris in Management Science.
He isn’t “just” a businessman. Instead he trades the markets to achieve financial independence using the principles of optionality; he always has insurance in case a “black swan” event manifests.
His unique investment strategy is based on preparing for the worst-case scenario. This means when the rest of the market crashes, he enjoys the spoils of his jackpot winners. Because of this, he has a storied financial career that includes trading derivatives, commodities, and other arbitrage options.
This work was employed by firms like Credit Suisse UBS, First Boston, Banque Indosuez, Deutsche Bank, BNP Paribas, and the Chicago Mercantile Exchange. He finally reached financial independence during the market crash of 1987.
From there, he pivoted out of finance and became a mathematical researcher and essayist. This landed him positions at a variety of universities as he released a series of books describing his financial ideology.
Much of it revolves around the ideas of chaos and predicting the unpredictable chaos in the natural world. It’s because of the extreme outliers averaged into our data that we consistently fail to recognize market patterns.
But Taleb invested in what’s known as the black swan events using derivatives through his company Empirica Capital.
Nassim Taleb Black Swan Theory
A black swan is an unpredictable event that forever changes the world behind it. The 2020 coronavirus was such a black swan event. No matter how much you believe in the virus, it’s always going to be a part of our world.
Taleb teaches a variety of ways to understand black swans. For example, imagine you and 99 of your closest friends are in a room together. The average net worth of U.S. households is $748,800, but then Jeff Bezos walks in the room with his net worth of $185 billion.
Suddenly the average net worth in the room is over $1.83 billion, and everyone’s a billionaire, right?
When looking at the post-pandemic economy, it’s easy to think we recovered. But outliers in the one percent, like Bezos, Bill Gates, and Elon Musk made hundreds of billions while over 10 million people remain unemployed.
This sounds great, except you’re not Bezos, Gates, or Musk. You’re one of the other people being averaged up. And Taleb specializes in finding and investing in these black swan events. Basically, he’s Chicken Little, and he’s betting on the sky constantly falling.
It’s not unlike what Michael Lewis describes in the book The Big Short. By betting against the banks, they made a lot of money when the black swan event of the mortgage crisis occurred. Markets crashed, and they increased their net worth.
That’s what Taleb helps businesses do.
How Did Nassim Taleb Make His Money?
Taleb was a successful options and derivatives trader before he started preaching his strategies.
He proved himself through his own firm by spreading his money across hundreds of targeted bets for black swan events. Basically, he buys and sells options and derivatives on the worst-case scenario, and every so often it happens.
He essentially helps businesses set up investment insurance. It’s a hedged bet. For example, if you bet on oil futures and typically have the long position, you can insure yourself by playing $99 on the long side and $1 on the short side. A big decline results in a huge win for the short bet that can limit losses on the long side.
Bear positions against the Dow, S&P 500, cryptocurrencies, and even commodities like oil and gold paid off for a short period in March 2020. The coronavirus crash turbo-charged everything and made options traders rich. Taleb is rarely surprised by such outlier events.
How Is Nassim Taleb So Rich?
Taleb is rich by putting his money where his mouth is. He recognizes the improbable and uses a deep suite of automated tools to scrape large swathes of data and identify black swan events. Thus, his business model is based on constantly losing with the occasional big jackpot payoff.
In fact, you wouldn’t be wrong to compare his cost vs payoff approach to playing and winning the lottery. You’re used to seeing multi-million-dollar winners paraded around the news. But you don’t see all the losers, nor the small winners. Nobody remembers second place. You shoot for the exception instead of the rule.
That’s how he got so rich, with an estimated fortune around $500 million, since he only receives small percentages of the deals he makes. He was managing funds, not his own money.
Nassim Taleb Anti-Fragility Theory
On the opposite end, Taleb advocates for a society that can resist black swan events. If the market were set up this way, he wouldn’t make money off his bets. But that’s what he wants. If the world could account for the outliers, the coronavirus crash wouldn’t have happened.
Volatility, stress, and other factors make you stronger. Why shouldn’t they also make our markets and money stronger?
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