Investing with a Barbell

Investing with a Barbell

Barbell strategy: a method that consists of taking both a defensive attitude and an excessively  aggressive one at the same time, by protecting assets from all sources of uncertainty while allocating a small portion for high-risk strategies

I am trying here to generalize to real life the notion of the “barbell” strategy I used as a trader, which is as follows. If you know that you are vulnerable to prediction errors, and if you accept that most “risk measures” are flawed, because of the Black Swan, then your strategy is to be as hyper-conservative and hyper-aggressive as you can be instead of being mildly aggressive or conservative. Instead of putting your money in “medium risk” investments (how do you know it is medium risk? By listening to tenure-seeking “experts”?), you need to put a portion, say 85 to 90 percent in extremely safe instruments, like Treasury bills – as safe a class of instruments as you can manage to find on this planet. The remaining 10 to 15 percent you put in extremely speculative bets, as leveraged as possible (like options), preferably venture capital-style portfolios (make sure that you have plenty  of these small bets; avoid being blinded by the vividness of one single Black Swan). That way you do not depend on errors of risk management; no Black Swan can hurt you at all, beyond your “floor”, the nest egg that you have in maximally safe investments. Or, equivalently, you can have a speculative portfolio and insure it (if possible) against losses of more than, say, 15 percent. You are “clipping” your incomputable risk, the one that is harmful to you. Instead of having medium risk, you have high risk on one side and no risk on the other. The average will medium risk but constitutes a positive exposure to the Black Swan. More technically, this can be called a “convex” combination…For your exposure to the positive Black Swan, you do not need to have any precise understanding of the structure of uncertainty.

The Black Swan,
Nassim Nicholas Taleb


Brilliant strategy really but of course there is nothing to stop us from seasoning this to our own taste. In my own investment portfolio I hold heavy positions in all four of Brookfield Management's Limited Partnerships...BIP.UN, BEP.UN, BPY.UN and BBU.UN. These holdings represent a huge (relative to the size of my portfolio) investment in income producing hard assets. Conversely I hold investments in OTEX, DSG, AIF, MAXR, BYL, GUD and RX. The stocks of these companies  largely deal with intangible assets. So there is a dichotomy here, a sort of barbell if you will.

I think there could be many variations on the "barbell" theme. One could employ investing in ETF's as an example of setting up his own personal version of the barbell approach. An investor is only limited to his imagination. Taleb use to trade options for a living and employed this technique in his trading, pretty sharp guy this Nassim Nicholas Taleb.

I find this a highly original and different alternative to the conventional approach to portfilio management which of course resides in the domain of the "institutional imperative" where creative thought is suppressed so as to preserve the status quo of fitting in with the establishment and not clashing with the drapes.