Part I - Financial Rules of Thumb, or Heuristics for Safe, Smart Investing
Rules of thumb to rule the day
Before you invest, make sure to follow the rules. Survival first, science and fun later.
My main heuristic that kept me out of trouble was this: always work with taxes in mind. What do I mean with this?
You know the saying?
In this world nothing can be said to be certain, except death and taxes. -Benjamin Franklin
When you hear that even Al Capone, the great mobster, was found guilty of tax evasion (because they couldn’t pin him down with anything else), you realize there must be something fundamental to this. Of course, in hindsight, once you know how the economy works, it is obvious that keeping in mind taxes is of utmost importance.
Now I’m making the case for being careful of taxes, stressing this point, because it is the mother of all tail risks.
https://twitter.com/nntaleb/status/1296551618872258560?lang=en
Nassim Nicholas Taleb (above) is a Lebanese-American scholar, statistician, former trader, and risk analyst, widely recognized for his groundbreaking contributions to the world of financial markets. With a deep-rooted background in derivatives trading and quantitative finance, Taleb's work primarily focuses on problems of randomness, probability, and uncertainty. He is most well-known for his development of the "Black Swan" theory, a concept that explains the disproportionate role of high-impact, hard-to-predict, and rare events that are beyond the realm of regular expectations in history, science, finance, and technology. The term has since become a common idiom in financial and economic discussions. Taleb is also a bestselling author, with his Incerto series, including "Fooled by Randomness", "The Black Swan", "Antifragile", "Skin in the Game", and "The Bed of Procrustes", collectively presenting a philosophical treatise on uncertainty. His work transcends the conventional norms of financial theory, providing profound insights and strategies to deal with uncertainty and randomness in the financial markets and beyond.
Main point: avoid all tail risk. Not reporting your taxes is the mother of all tail risks.
Play (the markets) safe!