Excerpts: Wealthtrack Interview with Nassim Taleb

CONSUELO MACK: Right. You were a derivatives trader, you advised hedge funds.

NASSIM TALEB: Yeah. I was, for 20 years, a derivatives trader. I ran a hedge for hedge funds. But one thing about finance is that there's nowhere in the world where you can understand the mechanism of Black Swans as much as in finance. Because everything that happens in history translates into a financial equivalent. To give you an idea: the first Great War, okay? Everybody in school told us when we were school children that it was very predictable. Because there was tension between the U.K. and Germany, right? And Austria. So natural -- you know what? When you know finance, you look at the bonds. The bonds, Niles Fergusson, the historian, showed that the bonds, the war bonds -- there was something called the war bonds, the war bonds did not know about that war. Okay? So it was really unpredictable because it was not priced in the market.

CONSUELO MACK: What do we, as individuals, need to know about the risk that chance plays in our lives? I mean the role that chance plays in our lives and also what do we need to know about these unpredictable events that have, again, these life-altering consequences?

NASSIM TALEB: The first thing I tell people is, "Most of you would not invest a penny in the stock market if you understood the risks." A lot of people take some risks. Not because of courage. Not because of informed decision-making. They take these risks because of ignorance. A lack of awareness and psychological blindness. Some risk involved in finance. For example, you hear stories of "Hey, the stock market yields eight percent, in the last year or so on versus bonds four percent. Therefore, in their mind, okay, they think that these eight percent are going to come year after year. Okay? Assuming it's right, okay? Assuming the story is right, you still have some randomness around this eight percent. You're going to get more some years, less other years, okay? Most people aren't investing while facing the consequences of not having a steady eight percent return. If they knew the variegation they could have, okay, they would not have invested in stocks. Now let's talk about investments that benefit from Black Swans. Typically, the classes of investment that have effectively -- I ignore these stories about stock market, in general, to look at really, what is it that produces returns in the long run? But producing returns in the long run is securities where you tend to lose smaller when you're wrong, or investment, security investment or ventures. And you can make big if you're right. Now what are these investments? Technology. People pooh-pooh tech. I mean people don't like talk down technology, all right? The technology, right, has, look at wealth, accumulation of wealth. Okay? These businesses seem to be volatile. These businesses seem to generally lead to bankruptcies. But you have a small probability of making a huge amount of money. So the businesses that I like are technology, biotech. I mean, think about it. Biotech doesn't seem to look good. But you have that small probability of a cure for cancer. Now these class of investments typically, they're not liked by the community. But they have been historically, okay, underestimated in their potential.

CONSUELO MACK: For an individual investor who wants to not just invest in their own business, which I know, you think is really is the way that most of us are going to make money is by investing in the stuff that we know...

NASSIM TALEB: Yes.

CONSUELO MACK: But for those of us who want a retirement that's more liquid or whatever, we can't invest in venture capital. It's not opened to us. So what do we do?

NASSIM TALEB: So basically, the first thing is negative advice- invest much less in the markets because you don't understand them. Put 90 percent of your money in treasury bills. And then broad diversify across very short-term treasury bills. This is the money you don't want to lose. Now ...

CONSUELO MACK: Except you're losing it on an inflation basis. You're going to lose money possibly every year.

NASSIM TALEB: It definitely beats losing money and then, okay? So with the remaining ten percent, I'm not going to tell you what risks to take. I'm telling you how, the degree of risk, which specific investment. Invest in as broad, as high a number. Okay? Very diversified. Very speculative things. Very speculative. Very diversified. Hopefully, as many as you can...Because you don't know where the next big idea's going to come from.

CONSUELO MACK: Or the next blockbuster drug. Or the next Internet.

NASSIM TALEB: Exactly. Or the next Google or the next Amazon. You don't know. All right? So you invest in these. Okay? And as many, very speculative, preferably ones you understand a little bit, very, very, very high number of these. Okay. Now what you have is a low-risk portfolio....Nothing bad, or a low- to medium-risk portfolio. All right? But it is much more robust, okay, robust to market crashes.

CONSUELO MACK: Two last questions. Bill Miller, who actually recommended, who runs the Legg Mason Value Trust, one of the legendary investors of this century, and the last century, basically recommended that we read your first book, Fooled By Randomness, which we shared with our viewers on an earlier WealthTrack. He wants to know who you’re reading now that is influencing your thinking.

NASSIM TALEB: A phenomenal book called “Serendipity in Medicine” by a gentleman called Meyers. I don't know the exact title. A phenomenal book. I mean, I believe that this is why I don't like theories. I believe that most technological discoveries are accidents. They come so you want to encourage people to do tinkering, tinkering, tinkering. And effectively, that book did a wonderful job at showing how most discoveries, many more discoveries in medicine came by accident than accepted by the medical establishment. That book is a wonderful exercise in showing us how randomness runs discovery.