The 80-20 Investment Strategy
Instead of following standard Markowitz “portfolio theory“ and allocating your investments across low/medium/high risk financial products according to your age group, Nassim Taleb has suggested that investors adhere to the 80-20 rule: invest 80% of your funds in the most conservative products available (e.g. US treasury bills) and the other 20% in the wildest, riskiest investments that you can find (e.g. startup funding).
Wild and risky investments are those that may go to zero but they also have a small chance of going through the roof. The odds that they go to zero are much greater than the odds of them skyrocketing to Mars.
Mr. Taleb’s thinking is that in a black swan triggered extreme financial crisis (e.g. the crash of 2008), a Markowitz-type portfolio will get demolished across the board. The 80% portion of an 80-20 portfolio susceptible to the black swan will suffer too, but because of its extreme conservative nature the likelihood of massive devastation is much less than for the Markowitz mix. For the remaining 20% segment, the black swan event may actually turn out to be a white swan (e.g. shorting the bull market before the 2008 crash).
I’m too chicken to buck the herd’s “age-based allocation” investment strategy, but I have set aside a small stash of “play money” that I’m willing to lose entirely on a wild and crazy investment.
After a fair amount of grokking, the wild and crazy investment I’ve chosen to risk my play money pool with is….. the fledgling Bitcoin movement.
I am by no means a libertarian ideologue (I lean toward the left), but the Bitcoin movement is fascinating to me for the following reason (plucked from the book “Digital Gold” by Nathaniel Popper):
“The root problem with conventional currency is all the trust that’s required to make it work,” Satoshi (the mysterious, unknown creator of the peer-to-peer Bitcoin network protocol) wrote. “The central bank must be trusted not to debase the currency.” The issue that Satoshi referred to here—currency debasement—was, in fact, a problem with existing monetary systems that had much more potential widespread appeal, especially in the wake of the government-sponsored bank bailouts that had occurred just a few months earlier in the United States. Many believe that the end of the gold standard (by Nixon in the 70s) allowed central banks to print money with no restraint, hurting the long-term value of the dollar and allowing for unbridled government spending.
Another reason why I’m drawn to the bitcoin community is the potential of the system to help the poor – those people who do not have access to bank accounts or credit cards and are forced to deal in cash. The increasing uptake of Bitcoin in Argentina, whose government is notoriousy fiscally irresponsible with its peso currency, is enough evidence for me to believe that the Bitcoin network will do for money what the internet has done for information.
The thing that makes Bitcoin a wild and crazy investment is that….
Bitcoin itself is always one big hack away from total failure.
Since the literal disappearance of 100s of millions of dollars worth of Bitcoins from the Mt. Gox implosion and the high profile “Silk Road” disaster did not kill Bitcoin in the crib, it illustrates the underlying strength and robustness of the system. Thus, I made the first of several Bitcoin buys through the Coinbase exchange:
My strategy is to buy and hold for the long, long term. Oh, and to insulate myself from another Mt. Gox type debacle, I’m moving my Bitcoins off of the Coinbase site and into my own personal Bitcoin wallet as soon as I receive them.
If you want to start grokking Bitcoin for yourself, I suggest looking at the following resources that won me over:
Book: Digital Gold – Nathaniel Popper
EconTalk Podcast: Wences Casares on Bitcoin and Xapo
EconTalk Podcast: Nathaniel Popper on Bitcoin and Digital Gold