David Bowie’s Chaos Theory

“When you get that lack of stress upon what’s important and what isn’t… [y]ou’re left with this incredibly complex network of fragments that is our existence… There’s no point in pretending, well if we wait long enough, everything will return to what it used to be, and it’ll all be saner again, and we’ll understand everything, and it’ll be obvious what’s wrong and what’s right. It’s not gonna be like that. [We’re] … surfing on chaos.”

— David Bowie, 1995

Surfing on Chaos

I just saw Moonage Daydream, the new David Bowie documentary, which presents Bowie singing, dancing, painting, chatting, smiling, glowering, and wearing a kimono, all inspired by his belief that life in the 20th and 21st centuries is defined by chaos.?

Bowie believed that modern life floods humanity with random information — car horns, news tickers, TV ads, music, movies, war, politics, and junk mail — that overwhelms our conscious brains’ ability to handle it.

And he said so in 1995, when life was a candle-lit bubble bath compared to the perpetual sonic boom of information overload we live in now.?

Since 1995, we’ve experienced the: Tupac and Biggie murders, Monica Lewinsky scandal, Spice Girls, Euro, iPod, dot-com crash, September 11th attacks, Iraq War, rise of social media, Spice Girls reunion, iPhone, 2008 recession, invention of crypto, election of Donald Trump, 2017 crypto bull market, second Spice Girls reunion, COVID-19 pandemic, 2020 recession, 2020 crypto bull market, Bored Ape Yacht Club, rise of hyper-inflation, and 2022 crypto bear market.

Bowie had no idea how right he was.

How are we supposed to deal with all this information? The honest answer is that we can’t. But there is something we can do instead. Something that might make us not only happier crypto investors, but happier people – we can stop trying.

Why degens can’t surf

Nassim Nicholas Taleb has spent decades studying randomness and how we try to understand it. In other words, how do we surf on chaos (and are we any good at it)?

His basic conclusion, across seven books, is that we have no idea what we’re doing. We’re finding patterns where there aren’t any. We’re making predictions based on false assumptions. We’re trying to understand things that can’t be understood, and we’re trying to control things that can’t be controlled.

We’re bad chaos surfers.

And the harder we try to surf the chaos, the worse we do. We think that if we push ourselves harder, read more, consume more data, more data, more data, we can get on top of the chaos, master it, understand it, predict it, and make money from it. Wrong.

In fact, Taleb argues the opposite. The more data we consume, the more likely we are to encounter bad information, see false patterns, and send ourselves down a rabbit hole based on false assumptions.?

As Taleb puts it in Antifragile, “More data means more information, perhaps, but it also means more false information.”

Instead, Taleb proposes that our strategy for investing (along with everything else) should be “antifragile.”

How to invest the antifragile way

Taleb says that “antifragile” is the opposite of “fragile.” But most of us think the opposite of fragile is “strong.” If something is fragile, it breaks easily. So the opposite of fragile should be something that doesn’t break easily, right? Not to Taleb.

Taleb proposes that “fragile” means something that gets weaker when injured, so the opposite is “antifragile,” something that gets stronger when injured.?

Muscles work this way. When you exercise, you break your muscles down, and they grow back stronger.?

Forests work this way. When a forest fire breaks out, it clears old growth, makes space for new growth, and the whole forest gets stronger.

Markets also work this way. When businesses enter the marketplace, some fail, others succeed, and the whole market gets stronger.?

Of course, this only works if the injury isn’t so destructive that the antifragile thing dies. A moderate forest fire is good for the forest, but only if there are enough trees left to keep growing afterward.

Taleb proposes that you can build antifragility into your investment portfolio by using barbell investing.

Build a barbell

Taleb has two central tenets of investing: first, our market predictions are bad, and analyzing data makes them worse, so we have no idea what’s going to happen, and; second, we want to be antifragile, so when a shock hits the market, we not only survive it but profit from it.

In other words, we don’t know when a chaos wave is coming, but when it does, we need to be ready to surf the chaos. And if we screw up, we need to survive.

The barbell serves both needs. Sort every potential investment by risk – low (cash and U.S. government bonds), medium (mutual funds like the Vanguard 500), and high (crypto, options, startups, high-growth tech stocks).

In the barbell, you eliminate the medium risks. These have limited upside but unlimited downside because Taleb believes our risk assessments are all wrong, so medium risks aren’t medium risks – they’re unknown risks with limited upside.

Next, you stockpile extremely low-risk assets, mostly cash. Remember, you can’t accurately measure risk, so you need to assume that you could lose everything you invest. That means you need to stockpile enough no-risk assets to survive, no matter what happens.

Finally, you take a smaller portion of your total assets, perhaps 10%, and pursue aggressive, high-risk investments. These are positive asymmetrical opportunities because if you lose everything, your maximum loss is only 10% of your assets, but if a chaos wave comes in, you could catch it and maximize your profits.?

When it’s set up, a barbell portfolio looks like this –

Taleb summarizes it as, “antifragility is the combination [of] aggressiveness plus paranoia… protect yourself from extreme harm, and let the upside… take care of itself.”

So, put crypto into this mix. A few weeks ago, we published a blog about how ETH correlates to the S&P 500, with a lot more upside but also a lot more volatility (historically speaking).?

If you invested in an S&P 500 mutual fund, that would be medium risk – not suitable for the barbell.?

But if you invested in ETH instead, you might be able to follow the S&P 500 with more risk but also more upside.?

Or, going one step further, you could invest in AVAX, a smaller crypto, which highly correlates with ETH but has even more risk and even more upside.

What would you put in your barbell?

Surf’s up.