Picking Up Pennies In Front Of A Steamroller

I am a huge fan of Nassim Taleb. I think his books The Black Swan: The Impact of the Highly Improbable and Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets are essentially the last word on economics, life, and investing. Despite that, I have recently been pursuing an investing strategy that is fundamentally at odds with what I have learned from him. In his books, he derides common option strategies as “picking up pennies in front of steamrollers.” By this, he means risking a huge loss in return for making small, regular returns. So, how does this apply to me?

While I have been on vacation, I’ve been logging in to my online brokerage, and if the market starts going down, I buy short financials or real-estate ETFs. At the end of the day, I sell them, and I pocket a 1 or 2 percent return for the day (those are the pennies). Now, objectively, this strategy is senseless. If I had simply bought and held the ETFS for two weeks, I would, by my calculations, have made 50% more. Moreover, I ran the real risk of having all of my daily gains, and more, wiped out by an unexpected rise in the stock market (that would be the steamroller). Given that I knew all this, why did I still pursue this strategy?

First, I wasn’t risking much money. More importantly, though, the strategy makes psychological sense, in that it provides the kind of small, regular reward that we all enjoy. Which illustrates a major point of Taleb’s: that humans thrive on small, regular reinforcements of worth, but unfortunately the world is not built that way. Instead, for the most part, we get irregular, large rewards (and blows). Vacations should be a refuge from that irregularity, and a time of small rewards and disappointments. Having said that, I wouldn’t recommend this strategy to anyone. Eventually, you will get burned.

UPDATE: Today, I got run over by the steamroller

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