Taleb's Black Swan Hunting Method

Source: Citic Publishing House

When the masses are swallowed by the tidal wave 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 “outliers”?

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

Traders looked pale, some muttered 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 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 would never be fulfilled—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.

This scene has become one of the most metaphorical images in modern financial history: while most are swept away by the wave of randomness, a few have already built their ark.

From Beirut’s War to Wall Street’s Storm

In 1960, Taleb was born into an elite family in Lebanon. His grandfather was a Supreme Court judge, his maternal grandfather served as Deputy Prime Minister, and his father was a top scholar. His childhood bathed in the illusion of prosperity in “Little Paris of the Middle East,” where Lebanon’s per capita GDP even surpassed Italy. Everything seemed stable, civilized, and predictable.

However, a gunshot in 1975 shattered this illusion of stability. The Lebanese Civil War erupted, quickly consuming their homeland. Classmates died in the conflict, and his maternal 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 childhood friends will still be alive tomorrow.”

In the early days of the civil war, elites including his grandfather believed the conflict would end in 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 be an illusion, and experts’ 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, seemingly collecting “stable” fees daily, actually 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 the “Black Swan”: face unpredictable, impactful events.

A “Black Swan” refers to rare, unpredictable events with massive impact that, after the fact, can be rationalized. The term originates from Europeans’ long-held belief that all swans are white—until black swans were discovered in Australia.

The Black Swan

[US] Nassim Nicholas Taleb

Wan Dan, Liu Ning translation

Citic Publishing Group

In financial history, Black Swans have names like: the 1987 crash, the 1997 Asian financial crisis, the 2008 global financial crisis, and the 2020 COVID-19 pandemic… Their commonality is: unpredictable beforehand, but after the fact, everyone can craft “rational” stories.

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 true order and control the situation.”

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

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: “Next time someone pretends to predict the future, they should first show their past performance.”

He emphasizes the principle of “Skin in the Game”: only when people bear real risks for their decisions should their advice be taken seriously. He often quotes the ancient wisdom from the Hammurabi Code: “If the architect’s house collapses and kills the owner, the architect 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 appears rough, overweight, and coarse. Taleb says he would choose the latter.

The reason is simple: if someone who doesn’t look like a surgeon has been practicing for a long time, it indicates they’ve overcome more distrust based on appearances. They must have exceptional skills to have survived and gained trust.

A Long, Inevitable Wait for “Bloodshed”

Taleb’s ideas are not just theoretical; they have 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 simple but extremely arduous: continuously buy cheap deep out-of-the-money options as insurance against market crashes.

In normal years without crashes, these options slowly melt like ice, causing the fund’s net value to decline slightly—what they call “bleeding.” When a Black Swan strikes, these “insurance” contracts pay out hundreds or thousands of times over.

Essentially, it’s a long, painful wait for the inevitable “bloodshed,” 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—holding the S&P 500 plus a 3.3% allocation to Empirica’s fund—achieved a 12.3% return, outperforming the S&P 500 and many complex strategies.

This strategy has been validated countless times. On Monday, February 5, 2018, the Dow experienced its largest intraday drop ever, with market volatility resembling machine gun fire. Empirica profited handsomely.

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 do we have to stand against the long bull market?” 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, unable to tolerate the ongoing “bleeding.”

Soon after, patience paid off dramatically. In 2020, the COVID-19 pandemic caused markets to panic and crash, and Empirica’s fund hit a high point. The client who had previously exited due to “bleeding” missed this opportunity entirely.

This full cycle vividly illustrates Taleb’s philosophy: understand fat-tailed distributions, build advantageous asymmetry, endure ongoing “bleeding,” and wait for rare but impactful events.

But this path is seldom taken because it demands investors to fight their deepest instincts—desire for certainty, the psychological pressure of peers making money, and the anxiety and doubt brought by time.

In 2001, after profiting from 9/11, Taleb appeared on an American TV show. The host asked how he predicted such unexpected shocks.

Taleb replied: “I cannot predict. Patience is the first rule. You must not 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 unavoidable, 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.”

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

They truly cannot predict; they just prepare.

The Fool’s Random Walk

[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 practices mentally: suppose the worst has already happened, then the mental torment caused by randomness during the remaining trading hours will be much less. He finds this exercise more helpful than seeing a psychologist because the risks and damages are limited and known.

Physically, he builds physiological antifragility through “reversible stress.”

Taleb is a fitness enthusiast. He cycles 900 km a month and can deadlift heavy 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 been reading 30-60 hours weekly since age 13. After nearly thirty years in the industry, he spends only about one-third of his time trading, the remaining two-thirds on reading and research.

Contrasting sharply, he rarely watches news. He believes that, unless something truly important happens, listening to news makes one only a 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%. 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 significant deviations at the tail, the information contained in normal deviations is minimal. Thus, the middle part of the distribution is mostly noise.

For example, after a black swan appears, every white swan you saw before was 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 gathering first, which consumes energy and signals to the body. That’s why he insists on exercising before eating, or even skipping breakfast.” “Because providing food before exertion confuses the body’s signals.”

He avoids drinks less than 1,000 years old, only consuming water, wine, and coffee—things that have been validated by long history. He refuses soft drinks and 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 serve the greater good 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 should pursue immortality, not myself.”

His wisdom system is encapsulated in his four-volume series on “uncertainty”—Fooled by Randomness, The Black Swan, Antifragile, Nonlinear Risks. These four books form a complete philosophy of survival: respect randomness, face the unknown, benefit from chaos, and stay clear-headed about personal stakes.

Nonlinear Risks

[US] Nassim Nicholas Taleb

Zhou Luohua translation

Citic Publishing Group

Today, with uncertainty pervasive and Black Swan events 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.

For individual investors and large institutions alike, his framework offers a new perspective on risk and opportunity. It teaches us that real safety doesn’t come from avoiding fluctuations but from responding correctly to them; wisdom isn’t in predicting storms but in 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 reconstruction—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”)