Taleb's Black Swan Hunting Method

Source: Citic Press Group

When the masses are engulfed by the waves of randomness, some have already built their ark.

Everyone dreams of making a fortune in the volatile trading markets, but why are only a few able to do so—those rare “outsiders”?

On October 19, 1987, the trading floor of Wall Street became a scene from hell in the financial world. “Black Monday” arrived, with the Dow Jones plunging 22.6% in a single day, setting a historic record.

Traders looked pale, some murmured to themselves while staring at the constantly jumping red numbers on the screens, others collapsed into their chairs, on the verge of emotional breakdown. Phone rings, screams, keyboard smashing—chaos. Wealth evaporated like an avalanche, and despair filled the air…

That night, no one on Wall Street slept—except for a 27-year-old trader. In an apartment in Manhattan, Nassim Nicholas Taleb slept soundly for a full 12 hours amid the global financial storm.

When he woke up, the world had already turned upside down.

Even more astonishing, the deep out-of-the-money put options that his peers mocked as “worthless paper” skyrocketed in value overnight. He had quietly bought these contracts, which the market believed were impossible to realize—he bet on the occurrence of “impossible” extreme events.

This calm and rebellious bet earned him millions of dollars amid the chaos, achieving financial freedom in one stroke.

This scene has become one of the most metaphorical images in modern financial history: when most are swallowed by the waves of randomness, a few have already built their ark.

From Beirut’s War to Wall Street Storms

In 1960, Taleb was born into a prominent elite family in Lebanon. His grandfather was a Supreme Court judge, his great-grandfather served as vice prime minister, and his father was a top scholar. His childhood bathed in the illusion of prosperity of “Little Paris in the Middle East,” when Lebanon’s per capita GDP even surpassed Italy. Everything seemed stable, civilized, and predictable.

However, a gunshot in 1975 shattered all illusions of stability. The Lebanese Civil War erupted, quickly consuming their homeland. Classmates died in the conflict, and his great-grandfather was forced into exile— a country stable for centuries suddenly collapsed amid modernization.

Taleb later recalled: “Risk, for me, means that when I have dinner every day, I don’t know how many of my friends I played soccer with during the day will still be alive.”

In the early days of the civil war, elites including his great-grandfather believed the conflict would end “within a few days,” but in reality, it lasted 17 years.

Beirut, his hometown, became the first “Black Swan” to enter Taleb’s life, teaching him his first lesson: the most solid stability may just be an illusion, and expert predictions are often wildly wrong.

This experience pointed him toward his lifelong research focus—understanding uncertainty. His privileged family gave him a “ticket” to escape the war: he studied mathematics in Paris, entered Wharton Business School, and finally landed on Wall Street.

There, he first encountered “options”—a financial instrument he fell in love with at first sight.

He was captivated by its “nonlinear” allure: buyers only risk limited losses but can gain disproportionate returns; sellers seem to earn “stable” fees daily but bear catastrophic risks. This asymmetry of “limited loss, unlimited gain” resembled the survival metaphor he experienced in Lebanon—true danger often lurks beneath seemingly safe patterns.

Looking back, the success of Black Monday in 1987 was no accident but a preliminary validation of this cognitive framework.

This experience prompted Taleb to systematically build his mental toolkit, providing three key pillars for surviving in an uncertain world.

First, recognize “Black Swans”: face unpredictable, impactful events.

A “Black Swan” refers to rare events that are impossible to predict beforehand, have enormous impact, but can be rationalized after the fact. The concept originates from Europeans’ long-held belief that all swans are white—until they discovered black swans in Australia.

The Black Swan

[US] Nassim Nicholas Taleb

Wan Dan, Liu Ning translation

Citic Publishing Group

In financial history, Black Swans have many names: the 1987 crash, the 1997 Asian financial crisis, the 2008 global financial crisis, the 2020 COVID-19 pandemic… Their commonality is that they are unpredictable but can be “rationalized” after the fact.

Taleb writes in The Black Swan: “Our world is dominated by extreme, unknown, and highly unlikely events, yet we spend most of our time discussing trivial matters, focusing only on what is known and repetitive.”

Second, become “Antifragile”: benefit from volatility.

The 1987 experience deepened Taleb’s thinking. He realized that the core issue is not just recognizing Black Swans but also how to profit from them.

He created the concept of “Antifragile”: the property of systems that not only benefit from chaos and fluctuations but require such chaos to survive and thrive.

“A gust of wind can extinguish a candle’s flame but can also make a bonfire burn brighter,” he wrote. “You seek order, but what you get is superficial order; embracing randomness allows you to grasp and control the situation.”

Based on this insight, he proposed the famous barbell strategy: allocate 85-90% of resources to extremely safe areas (like government bonds), and 10-15% to high-risk, high-reward areas (like venture capital), completely avoiding the “middle risk, middle return” mediocre zone.

The essence of this strategy is to create advantageous asymmetry: limited downside risk, enormous upside potential.

Third, believe in “Risk Sharing”: the ultimate principle of filtering noise.

In 2009, at a seminar in Korea, a financial executive confidently predicted the economy’s trajectory over the next five years. Taleb took the stage and told the audience: “Whenever someone pretends to predict the future, they should first show their past performance.”

He emphasizes the “Skin in the Game” principle: only when people bear real risks for their decisions should their advice be taken seriously. He often quotes the ancient wisdom from the Code of Hammurabi: “If the builder’s house collapses and kills the owner, the builder shall be put to death.”

This perspective helps us make many judgments. Suppose you need surgery, and there are two surgeons: one looks professional and eloquent; the other looks like a butcher—fat, rough-talking. Taleb says he would choose the latter immediately.

The reason is simple: if someone who doesn’t look like a surgeon has been practicing for a long time, it means they had to overcome more distrust based on appearance. They must have relied on exceptional skills to overturn first impressions and survive in the field.

A Long, Inevitable Wait for “Bleeding”

Taleb’s ideas are not just theoretical; they have many real followers on Wall Street.

If Taleb is the architect of the theory, then Mark Spitznagel is his most famous disciple and practitioner. The two co-founded Empirica Capital—a hedge fund fully based on Taleb’s philosophy, serving as a “laboratory” for his ideas on Wall Street.

Their strategy is extremely simple but execution is painfully demanding: continuously buying cheap deep out-of-the-money options as insurance against market crashes.

In normal years without crashes, these options slowly melt like ice, and the fund’s net value gradually declines—what they call “bleeding.” When a Black Swan strikes, these “insurance” policies pay off hundreds or thousands of times over.

Essentially, it’s a long, painful wait that knowingly involves “bleeding”—a spiritual discipline against human instincts.

As early as 2016, Spitznagel used backtested data to convince the California Public Employees’ Retirement System (CalPERS): a very simple binary strategy—combining the S&P 500 with a 3.3% allocation to Empirica—achieved a 12.3% return, outperforming the S&P 500 and many complex strategies.

This approach has been validated countless times. On February 5, 2018, the Dow experienced its largest intraday drop ever, with market volatility resembling machine gun fire, and Empirica made a huge profit.

But human patience is limited. Although clients understand and approve of the strategy, year after year, no crash occurs, and small, steady losses continue. Looking around, others keep making money. “Why not just follow the long bull market? Do we have to stand against it?” This skepticism reflects most people’s mindset.

In 2019, Empirica’s largest institutional client—the California Public Employees’ Retirement System, managing half the assets—ultimately withdrew because they could no longer tolerate the ongoing “bleeding.”

Shortly after, the patient’s reward dramatically arrived. In 2020, the COVID-19 pandemic caused a global market crash, and Empirica’s fund hit an astonishing return. The client who had exited due to “bleeding” missed this perfect moment.

This full cycle profoundly illustrates Taleb’s philosophy: understanding fat-tailed distributions, building advantageous asymmetry, enduring ongoing “bleeding,” and waiting for rare but impactful events.

But this is a path few take, because it demands fighting the deepest human desire—certainty, the psychological pressure of peers making money, and the anxiety and doubt brought by time.

In 2001, after earning big from 9/11, Taleb appeared on an American TV program. When asked how he predicted these unexpected shocks, he replied: “I can’t predict. Patience is the first rule. You can’t rush; it requires extreme patience. Every day, you face setbacks—like shedding a piece of skin—because hedging costs money. It’s a long-term volatility strategy; bleeding is inevitable, but you have to endure it.”

He compared this strategy to owning a gift shop, not knowing when Christmas will come. “Christmas arrives randomly, but you have to pay rent day after day.”

In a letter to investors, Spitznagel summarized: “We do not have a crystal ball.”

They truly cannot predict; they just prepare.

A Fool’s Guide to Random Walks

[US] Nassim Nicholas Taleb

Sheng Fengshi translation

Citic Publishing Group

Taleb’s Life Philosophy

Taleb’s investment philosophy extends into his lifestyle.

When he still had a job, he would write a resignation letter and lock it in a drawer, then keep working. He said, “Doing this gives me a sense of freedom. The worst or better outcome is just lying in the drawer—I know exactly what it is.”

Similarly, as a trader, every morning he would do a mental exercise: suppose the worst has already happened, then the mental torment caused by randomness during the remaining trading hours would be much less. He found this practice more helpful than seeing a psychologist because the risks and damages are limited and known.

On a physical level, he builds physiological antifragility through “reversible stress.”

Taleb is a fitness enthusiast. He cycles 900 km a month and can deadlift significant weights. He believes that regularly exposing the body to reversible fatigue and minor injuries is itself a form of antifragile training.

Antifragile

[US] Nassim Nicholas Taleb

Yu Ke translation

Citic Publishing Group

In information intake, he enforces strict “signal filtering” to combat noise pollution.

He deliberately avoids offices and organizations, sleeps until naturally waking, and voraciously reads. He has a classic saying: “Keep a clear mind; never talk to fools.”

He says he has spent 30-60 hours weekly on reading since age 13. After nearly thirty years in the industry, he actually spends only about one-third of his time trading, the remaining two-thirds on reading and research.

In stark contrast, he rarely watches news. He believes that when no truly important events happen, people who love news are only one step away from foolishness.

In his view, the frequency of information intake directly affects the signal-to-noise ratio. “The same information source, checked once a year, might have a 1:1 ratio; but if checked daily, the ratio could be 5%:95%. Consuming too much news and sugar daily can disrupt the system.”

This insight aligns with his financial philosophy: markets are fat-tailed. For extremely heavy-tailed phenomena, aside from the large deviations at the tail, the information contained in ordinary deviations is minimal. Thus, the middle part of the distribution is pure noise.

For example, after a Black Swan appears, every white swan you previously saw is just noise. Confirming a million times is less effective than denying once…

In lifestyle, he advocates “eating like ancient people” because “our bodies are derived from those ways.”

For instance, he doesn’t eat breakfast immediately upon waking because ancient humans didn’t have food right after waking. “You had to go hunting or gather, which required effort and burned calories before you could eat.” So he insists on exercising before breakfast, sometimes not eating at all. “Because providing food before exertion confuses the body’s signaling system.”

He avoids drinks with less than 1,000 years of history, only drinking water, wine, and coffee, as the body’s adaptation to these has been validated over millennia. He doesn’t drink soft drinks or high-sugar orange juice at breakfast—“that stuff is toxic!”

He also has a unique view on “longevity.”

He says, “I came into this world to ultimately contribute to the overall benefit of humanity, to reproduce and raise offspring, or to die like the heroes in stories. That way, my information (like my writings), my genes (my descendants), and my antifragility (contribution to the whole) are what I should pursue for eternal life, not myself.”

His entire wisdom system is encapsulated in his “Four Books on Uncertainty”—Fooled by Randomness, The Black Swan, Antifragile, Nonlinear Risks. These four form a complete philosophy of survival: reverence for randomness, acceptance of the unknown, benefiting from chaos, and staying clear-headed about personal stakes.

Nonlinear Risks

[US] Nassim Nicholas Taleb

Zhou Luohua translation

Citic Publishing Group

Today, with uncertainty pervasive and Black Swans becoming the norm, Taleb’s core insight is increasingly valuable: abandon the illusion of precise prediction, and instead build systems that benefit from volatility—that’s true resilience.

Whether for individual investors or large institutions, his framework offers a new perspective on risk and opportunity. It tells us that real safety doesn’t come from avoiding volatility but from responding correctly to it; wisdom isn’t predicting storms but building arks and even harnessing the energy of the storms.

His life philosophy further reminds us: dealing with uncertainty is not just external strategy adjustment but an internal mental reformation—we can shape ourselves into “antifragile” individuals.

As he says: “Fragile things break in volatility; resilient things survive; antifragile things thrive in volatility.” (Excerpt from the podcast “Face-to-Face” “Becoming a Taleb Disciple”)