If you are a stock market investor, this is the book you should be reading if you have not done so already. It would have been easier for you had you absorbed what Taleb has to say many years ago, but now you have had a taste of the negative, you can turn your efforts into the positive. I remember attending the lectures of John Kenneth Galbraith who spoke often of stock market crashes. His ideas were based on a thorough reading and analysis of the 1929 crash. Investing in the stock market is gambling, but it may be the only way that the 'small' investor has to get a portion of the capitalist economic pie. The rewards of investing in stocks and shares can be considerable, but the small investor has always to be aware of the sharks and black holes.What Taleb does very well is show how self deception can dominate stock market and for that matter credit market advice giving to the point where it absorbs most of the capital of investors who lose almost everything. I might add, in one foul swoop. That's the danger, the risk, the eventual out turn from speculation that is completely outside one's control. We see the Donald Trumps of this world and expect that he has some secrets that he can share. The only problem is that a host of Trump wannabees have lost heavily in the property market. What's Trump's secret you wonder?
Well, you need to read Taleb's book and you will begin to understand how those investing also hedge. Hedging is when you take the risk out of investing realizing that you are not an expert investor or adviser, but part of a largely random process that can be terribly destructive of valuation of capital and almost everything else.
In the UK, the individual in the civil service who mailed a package containing a disk with people's private information thought that he knew the mail system, that it was secure. The upshot was that the individual took a risk and almost everyone in the country, almost 25 million people, lost big time. It would have been better for the government to install a fail safe system of auditing so as not to risk people's private information. This is what hedging is all about. Its about making sure that you are not exposed to risk. You carry on your business. You make money. But, you do not take unnecessary risk.
In foreign exchange operations, CLS Bank, does this very task of eliminating certain kinds of risk. FX dealers hedge their currency positions all the time so that their banks are not exposed to unnecessary risk. When I worked in Barclays Bank we were put on courses that showed us how to build a currency book and maturity ladder that got you where you wanted to be, largely without risk taking. That's the way money remains with you.
This is what the IMF SDR valuation is all about. Smart countries follow the SDR valuations of their currencies so as to avoid risk, avoid Asian financial implosion! What do you think China is doing? If it followed the advice of the US authorities it might be taking unnecessary risk so it has to monitor the value of its currency against all the major currencies. This way it avoids the rsik of an implosion and disasterous surprise and gradually moves in the direction it needs to move. Look at the Chinese exchange rate. Is is moving in the right direction? This is a question that you need to ask in a period of wild speculation in oil as a commodity.