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Split Your Bets: Using the Barbell Strategy to Chart Your Own Path

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    J. S. Anderson

What is Barbell strategy?

The barbell strategy is an investment approach proposed by Nassim Taleb in the book The Black Swan. It is a way to structure your portfolio to benefit from Black Swan events - rare, unpredictable, and highly impactful occurrences.

The key characteristics of the barbell strategy are:

  • Split your funds into two extremes - hence "barbell". For example, 90% in very low-risk assets like government bonds, and 10% in high-risk speculative investments.
  • The large low-risk portion protects your downside and provides stability.
  • The smaller high-risk portion allows you to profit from unexpected events. This is the volatile barbell end.
  • By avoiding the "middle", you limit exposure to unforeseen Black Swans that can crush moderate-risk investments.
  • Optionality is built into the volatile portion to generate windfall gains if certain low-probability scenarios occur. Examples are put options, venture capital, or insurance.
  • Rebalance periodically between the stable and volatile bars of the barbell.

Examples of low-probability scenarios that could generate windfall gains

  • Buying long-dated put options on a market index. A sudden and sharp market crash would drive the value of the puts sky high.
  • Investing in pandemic insurance prior to the outbreak of an epidemic. The payoff would be huge if the unlikely event occurs.
  • Shorting vulnerable subprime mortgage securities before the 2008 housing crisis. The bet would pay off immensely when the bubble popped.
  • Investing in cybersecurity firms just before massive high-profile hacking incidents like Equifax. Their business would boom after the attacks.
  • Getting in early on a rising political extremist who goes on to gain power. Huge gains if the low-odds candidate wins.
  • Buying way out-of-the-money call options on a biotech firm that makes a surprise cancer-curing breakthrough.
  • Investing in a nation like South Korea just before an unexpected economic growth miracle.
  • Betting on unlikely disruptive technologies like home 3D printing right before they go mainstream.

How to use Barbell strategy in your life

The barbell strategy concept can certainly be applied to life decisions beyond just investing.

For example:

You can spend 80% of your time on your primary career/job that provides stability and cover your needs. Use 20% to pursue side projects, businesses, or high-risk opportunities that could generate huge upside.

About solve problems. Tackle 80% with proven conventional solutions. Brainstorm creative upside-down approaches for 20% not amenable to standard methods.

About Socialisation, have 80% of your social network consist of close family and friends for support. Use 20% to connect with interesting new people from diverse backgrounds, opening up new possibilities.