Excerpt. . .

It is 5 A.M., and again, I can’t sleep. I find myself locked into reading the book Tomorrow’s Gold by Marc Faber. I find the book has an interesting thesis, many important historical examples, and engaging information about boom-and-bust cycles.

But there is a problem…

How on earth do I make use of all this? There isn’t any applicable information for me to use.

This is what I believe the worst part about 95% of investment books are. They are expensive, the stories are overstretched, and it is usually the same as the others. If we’re lucky, after reading 300 pages, there is a single page of investment “advice” at the end.

“Buy physical gold (GLD),”
“Buy real estate,”
“Buy and hold stocks,”
or, “Diversify stocks and bonds by 60/40.”

I want actual practical advice. Taking the important theories and frameworks I find relevant and making them applicable for investing and everyday life.

That is why I am starting with this key topic…

We need to find the optionality of things. This concept is from Nassim Taleb and Mark Spitznagel.

After reading the tome, that is Taleb’s book, Antifragile, I cherry-picked the important parts to apply towards my portfolio and life.

In summary: you need to always look for opportunities that offer favorable optionality and take advantage of them.

Optional – left to one’s choice; not required or mandatory:

Ex: a formal dress is optional.
Ex: exercising an in-the-money option is optional if you want, but don’t have to.

Just as the word optional means, it is something that is not mandatory. For instance, these are situations that offer a fixed low risk/cost and have substantial upside. Like buying out-of-the-money options. You pay a small amount upfront for the right, but not the obligation, to exercise the option in the future if you wish. Therefore, at worst, you can only lose your upfront capital. But at best, you can have significant upside. It is almost exactly like how insurance works.

One of my favorite stories of optionality is about Thales and the Olive Options. Thales lived in Greece during the 600 BC period and was a philosopher. He was a practical man and understood that writing philosophy wasn’t profitable. So, he took advantage of the conditions offered to him about his speculations on the coming olive harvest…

Corner in Oil

Thales’s reputation for wisdom is further enhanced in a story which was related by Aristotle. (Politics, 1259 a 6-23). Somehow, through observation of the heavenly bodies, Thales concluded that there would be a bumper crop of olives. He raised the money to put a deposit on the olive presses of Miletus and Chios, so that when the harvest was ready, he was able to let them out at a rate which brought him considerable profit. In this way, Thales answered those who reproached him for his poverty. As Aristotle points out, the scheme has universal application, being nothing more than a monopoly. There need not have been a bumper harvest for the scheme to have been successful. It is quite likely that Thales was involved in commercial ventures, possibly the export of olive oil, and Plutarch reported that Thales was said to have engaged in trade (Plut. Vit. Sol. II.4).

Simply, Thales expected a huge olive harvest. Therefore, he went out and paid small fees to lease many olive presses for a fixed period (as if he were buying call options – paying upfront premiums for a fixed time period), which was an indirect way to profit from olive oil. Thus, he had the right to use the presses if he chose, but it wasn’t mandatory. Worst case scenario, he loses his downpayments, never uses the presses, or simply rented them out enough to recoup his money. As quoted above, “… Aristotle points out, the scheme has universal application, being nothing more than a monopoly. There need not have been a bumper harvest for the scheme to have been successful.

Thankfully, in his favor, there was a huge harvest. And, when others came to turn the olives into oil by using the pressers, they were forced to pay Thales a substantial profit to do so.

Thales basically made the first option…

Optionality can also be used in everyday life. . .

-> Read the rest here. . .