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Catastrophe – Interactive Essay Lesson A

Hello and welcome to this months’ Interactive lesson, part A.

This is an excerpt, which means a section, from one of my favorite books called ‘Anti-fragile’. I did a past VIP lesson about this book. Going to do a small section from this because it’s related to, it’s connected to our topic.

Part A you’ll learn the vocabulary. In part B I’ll ask you questions so you can learn all the phrases, vocab and grammar, everything much more deeply. Let’s begin.

Seneca’s Barbell

This brings us to the solution in the form of a barbell. About all solutions to uncertainty are in the form of barbells. What do we mean by barbell?

The barbell, a bar with weights on both ends that weightlifters use, is meant to illustrate the idea of a combination of extremes kept separate with avoidance of the middle. In our context it is not necessarily symmetric. It is just composed of two extremes with nothing in the center.

I initially used the image of the barbell to describe a dual attitude of playing it safe in some areas (negative black swans) and taking a lot of small risks in other areas– open to positive black swans; hence, achieving antifragility.

That is, extreme risk aversion on one side and extreme risk loving on the other, rather than just the medium or the beastly moderate risk attitude that, in fact, is a sucker game. But the barbell also results, because of its construction in the reduction of downside risks. The elimination of the risk of ruin.

Let us use an example from vulgar finance, where it is easiest to explain, but misunderstood the most. If you put 90% of your funds in boring cash– assuming you’re protected from inflation– and 10% in very risky, maximally risky securities, you cannot possibly lose more than 10%, while you are exposed to massive upside.

Someone with 100% in so-called medium risk securities has a risk of total ruin from the miscomputation of risks. This barbell technique remedies the problem that risks of rare events are incomputable.

Here the financial barbell has a maximum known loss; for antifragility is the combination, aggressiveness plus paranoia. Clip your downside. Protect yourself from extreme harm and let the upside, the positive black swan take care of itself.

All right, let’s go back to the beginning. This is a short one, but as you can see, lots of advanced vocabulary. This is fairly difficult so let’s go slowly, learn the vocabulary so you can understand this fully. Back to the beginning.

Vocabulary

This brings us to the solution in the form of a barbell. It’s the solution to the problem of risk, the problem of catastrophe, the problem of potential disaster. How do we prepare for that, that terrible risk, that terrible disaster? Here’s his solution, the solution in the form of a barbell.

About all solutions to uncertainty are in the form of barbells. So barbell, you know barbell, you go to the gym right. You lift it. It’s a bar and there’s a weight on one end and a weight on the other. There’s nothing in middle. The weights are not in the middle. The weights are on both ends. So this is the image, it’s a metaphor.

What do we mean by barbell? The barbell, a bar with weights on both ends that weightlifters use is meant to illustrate, meant to show the idea of a combination of extremes kept separate.

Extremes kept separate – So you have to just imagine a line, right? A line, and the extremes are on both ends, the far left and the far right. Those are the extremes and in the middle is just the moderate or the middle.

So he’s saying that, to prepare for catastrophe, to prepare for risk, you need a strategy that is extreme, that has two extremes. You don’t want to be in the middle. You don’t want a moderate strategy. That’s what most people think, but he says that that’s actually bad.

You want avoidance of the middle, avoidance of the middle, avoid the middle, avoid the moderate. You need two extremes that’s how you protect yourself best.

In our context, in our situation, it is not necessarily symmetric. It is just composed of two extremes with nothing in the center.

Symmetric – has the idea of balanced. It means the same on both sides, symmetric.

So a barbell when someone lifts weights, it’s symmetric, usually the same amount of weight on both sides. The left side has let’s say 50 kilos then the right side also has 50 kilos, so it’s balanced, easy to lift. That’s symmetric. The opposite is asymmetric.

Asymmetric – means each side is different. So, if you had 50 kilograms on one side and 20 kilograms on the other, that’s asymmetric, the two sides are not the same.

So he’s saying, you want two extremes but maybe not symmetric. It means each extreme, each side of your strategy might be balanced differently. But the important part is there’s nothing in the middle, nothing in the center.

I initially used the image of the barbell to describe a dual attitude— Initially – means in the beginning. So I first, in the beginning— I initially, I first used the image, the picture of the barbell to describe a dual attitude.

Dual – means two. It means having two parts or two pieces, dual.

A dual attitude of playing it safe in some areas and taking a lot of small risks in others. So this is his strategy to avoid disaster, to be antifragile, to be safe. It’s a two-part strategy, a dual strategy. One part of the strategy is playing it safe.

Playing it safe – means being very careful. It means to act carefully, to be very, very, very careful, play it safe; don’t take risks. Be super careful.

In some areas, playing it safe in some areas, and then in parenthesis he says (negative black swans).

Black swan – is an idiom, it’s a little slang. A black swan is a rare, meaning not common, big event. It’s a rare, huge event, often unexpected. It can be negative or positive. So, for example, if we look at money, like the stock market, stocks.

A black swan event, it would be a huge crash. That would be a negative black swan; a huge negative event. It’s rare, but if the stock market dropped to almost zero that would be rare, it doesn’t usually happen, but it’s a huge event. In this case it would be a disaster, a very big negative black swan event.

But it could also be positive, so if the stock market in two days doubled or tripled and suddenly shot up very, very, very high suddenly. Again, that would be a very rare event, a huge, big rare event that would be positive, in this case, positive if you had money in the stock market.

So he’s saying for possible negative black swans, possible disasters, you want to play it safe. You want to be very, very careful and prepare for them. But in other areas you want to take a lot of small risks, small, small risks in other areas and that’s open to positive black swans, positive huge events.

Hence – means therefore; hence, therefore, hence achieving anti-fragility.

Fragility – means breakability, how easy can you break or how can something break. If something is fragile– that’s the adjective– if something is fragile it means it breaks easily like glass. Fragility is the noun. It’s the condition of being breakable.

So anti-fragility – is the opposite it means not easy, not easily broken. It’s the condition of being tough. It means you can survive. Survivability is another way to put it, anti-fragility.

Continuing—

That is, again it means therefore, extreme risk aversion on one side and extreme risk loving on the other. This is his strategy. So on one side, one extreme, risk aversion— Aversion – means avoidance, to avoid risk.

So, for possible negative events you want to avoid them, extremely avoid them, avoid risk of terrible catastrophes. Avoid the risk of disasters on one hand.

Now also, at the same time, you want to love the risk, extreme risk loving on the other. You want to love the risk where there’s a big potential gain.

So this is rather than, instead of just the medium or the beastly moderate risk attitude—

Beastly – here means ugly, ugly; the ugly moderate risk attitude.

— that, in fact, is a sucker game.

So he’s saying the moderate attitude, like trying to be in the middle for everything, kind of a middle risk attitude, a middle risk strategy, he says, is actually the worst strategy, it’s the most dangerous. It’s ugly. It’s beastly, beastly, ugly.

And he says, in fact, it’s a sucker game, a sucker game. This is nice slang, a sucker—

A sucker – is a person who is foolish. They’re easy to fool, easy to trick them, easy to lie to them, easy to cheat them. We call that person a sucker. You say hey, will you give me $1000 please? I’ll pay you back later. And they say oh, okay sure, here. That’s a sucker. They’re kinda stupid. They’re easy to trick, easy to cheat, a sucker. So a sucker game means a game for suckers, a game for fools.

So he’s saying that having a medium risk strategy, trying to focus on medium risk is a sucker game. It’s a game for fools.

He says the barbell strategy also results, because of how it is constructed, how it’s made. The barbell strategy results in the reduction of downside risk, the elimination of the risk of ruin.

This is very important, let’s talk about the meaning of this. The reduction of downside risk—

Downside – means negative, downside risk means negative risk, the risk of terrible things happening.

This phrase is used a lot in investing and business; downside risk. It’s the risk of something bad happening, the risk of a bad result, the risk of disaster. He’s saying his strategy results in the elimination—

Elimination – means get rid of, destroy, erase

— the risk of ruin.

Ruin – means destruction, total destruction, total destruction. The risk of ruin.

So, for money that would mean losing all your money right, if you were investing? If you invest in something and then let’s say you buy some stocks. You buy a stock and it goes to zero. Then you lose all your money, you are ruined. That’s an adjective. That situation we would call ruin, ruin; complete destruction, complete disaster, ruin.

So he’s saying you want to eliminate, you want to protect against, get rid of this risk. You don’t want to do things where you can lose everything. Now he’s going to use an example for money, but this strategy’s good for anything.

Let us use an example from vulgar finance, where it is easiest to explain.

Vulgar – means kind of rude. Again, it has the idea of a little bit ugly, vulgar.

So he’s kind of joking here, vulgar finance, meaning— some people think that money is kind of, you know, ugly like it’s not a nice area of life. Some people don’t like to talk about money or making money. So he’s kinda joking saying let’s use an example from vulgar, from the ugly world of finance; from the rude world of finance.

He’s saying let’s use this example because it’s easiest to explain, it’s easy to see how this works. If you put 90% of your funds– your money–, in boring cash—

Cash – just means dollars, euros, yen, maybe something like gold or silver.

He’s saying this is boring, you’re not going to make a lot of money from that. You’re just going to keep your money. There’s very low risk. If you have all your money in just dollars, euros and gold and silver it’s pretty low risk. It’s not going to go to zero unless the whole government collapses, so it’s boring.

Especially, he says, if you protect yourself from inflation. So maybe you’re making just a little interest from it, you’re protected against inflation. You put 90% of your savings, 90% of your funds in just boring, boring cash. You’re not going to make much from it but you’re not going to lose it all.

And then put 10% of your money, 10% of your funds in very risky, maximally risky securities.

Maximally – means the most, the most amount, the maximum, the maximum risk.

So he says take 10% of your money, invest it in maximally risky, the most risky, the super risky securities.

Securities – basically means stocks. That’s the most common. It can have a little more complicated meaning for people in business and investing, but the general idea is stocks, investments, securities, investments.

So, if you put 10% in very risky securities, investments, you cannot possibly lose more than 10%, while you are exposed to a massive upside. So he’s saying 90% of your money is in something super, super, super safe; cash, gold, silver, things with a little bit of inflation protection, maybe government bonds, things like that. Super, super safe, 90% is safe, is protected, you won’t lose it.

So only 10% can you lose. You put the 10% in things that are very risky, that might go up a lot or might crash. So even in the worst situation if it crashed, you’d only lose 10%, your 90% is protected.

But at the same time, you’re exposed to massive upside. So this is the opposite of downside.

Upside – means benefit, positive outcome, positive results.

Massive – means huge, super big

So you only have 10% invested, you can only lose 10% but, because you’re investing in very risky things, you’re also exposed to, you have the possibility of very huge gains. That 10% might, you know, one of your risky investments might go up a huge amount.

On the other hand, someone with 100% (of their money) in so-called—

So-called – means that’s what people say. They’re called medium but he doesn’t agree.

When you say so-called something, it means this is what people say but I don’t agree. So he’s saying people call this medium risk, but he believes it’s actually high risk.

So, on the other hand, someone with 100% of their money in so-called medium risk securities has a risk of total ruin from the miscomputation of risks.

Miscomputation – means a bad computation.

Computation – means math, bad math, bad calculation, bad addition/ subtraction/ multiplying/ dividing.

So he’s saying people who invest in medium risk, let’s say like a stock market fund, he says they’re miscalculating they’re doing bad math. They think it’s medium risk, but in fact it’s much higher risk, it’s actually high risk.

Because, if you have investment in medium risk, let’s say you invest in the top 500 stock companies. He’s saying the problem is, those companies, the whole stock market could crash, maybe not zero but it could go down a lot and you could lose a huge amount of money.

You could be ruined, financial ruin, financial destruction— because you miscalculated. You had a miscomputation, bad math, a miscomputation of risk, you didn’t do the math of risks well. You added it up incorrectly.

He’s saying my barbell technique remedies (cures)—

A remedy- is a cure and here it’s the verb to cure, to remedy.

My barbell technique, my barbell strategy remedies, cures the problem. The problem that risks of rare events are incomputable. So he’s saying rare events, like a big stockmarket crash, like an actual disaster, any kind of catastrophe, they’re incomputable.

Incomputable – means they cannot be predicted. They cannot be calculated.

Lots of people try to calculate it. They try to predict, but really these huge big events, these big disasters, these big catastrophes, we really can’t predict them. They’re incomputable.

They can’t be added up. They can’t be analyzed. They can’t be predicted.

So he’s saying with my strategy, the financial barbell, the financial situation, the strategy has a maximum known loss. Right, you know you can only lose 10% with his strategy that’s the maximum known loss.

Finally, he says, for antifragility, his strategy of being anti-fragile, anti-breakable, not breakable is the combination, it’s two strategies. It’s the combination of aggressiveness plus paranoia.

Aggressiveness – means to be very strong, to take strong action.

Plus paranoia – paranoia is extreme fear, extreme carefulness.

In other words, clip your downside.

Clip – means to cut, to clip means to cut.

Clip your downside means, cut your downside, cut the risk of ruin. Cut the risk of negative things happening. Protect yourself from extreme harm—

Harm – means pain or hurt or destruction; harm.

So you want to protect yourself from extreme, from big harm, from disasters, and let the upside, the potential good results, the positive black swans, the good big events that are unpredictable take care of itself.

Let the situation take care of itself – means let it happen; let it happen by itself. You can’t control these things. Just let them happen and with this strategy you’ll be okay. At the worst, you’ll be protected, you won’t be ruined, you won’t be destroyed. At the best, you’ll actually make money. Or you can use this same strategy in other areas of life. We’ll talk about that in the commentary.

That is the end of Part A. On to Part B.