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What’s a similarity between investing and training?

On the 3rd of January at 7am we drove off the ferry into Ajaccio, where we stopped for an early breakfast and to get some fresh vegetable from the local market before driving for 40min to Sari d’Orcino. My mother’s side of the family has been living in Sari d’Orcino for at least three generations. We decided to use one the family house as our base camp for the coming year. This small village with a population of c. 270 inhabitants is full of history and childhood memories. At 400m elevation it’s ideally located between the sea and mountains for trail and triathlon training.

The next morning, Karina and I went for a slow pace 10km trail rising above the village with magnificent view of both sea and snowy mountain caps.

While running, we started debating the pros & cons of different endurance training philosophies. Each period seems to have its fashion, like HIT nowadays, but one approach has endured the test of time – the 80/20 approach – where an athlete trains 80% of the time at easy/slow pace and 20% of the time at very high intensity.

I couldn’t help notice some similarities with the barbell strategy used in finance. Is it pure coincidence I wondered? The barbell approach in investing consists of allocating c.80% of your asset in very safe investments and c. 20% in very risky investement with uncapped upside. Nassim Taleb among others has demonstrated that that barbell strategy is superior to investing 100% of your asset in median risk/reward. Two fundamental insights are driving this important result:

1) modern economies are nonlinear complex systems with financial & economic variables exhibiting fat tails. A complex system consists of a large number of mutually interacting parts, open to their environment, which self organise and often result in surprising novel macroscopic « emergent » properties. A visual example of such a system is a flock of birds. A key property of complex systems is that a small perturbation can result in very large consequence – think of the butterfly effect.

In a world dominated by fat tails, the mean of the probability distribution will rarely correspond to the sample mean because rare events with enormous consequences will dominate, so sample size is almost always too small to capture the full distribution. Consequently, metrics such as standard deviation, beta, sharp ratio, etc. are also uninformative.

2) surviving such low probability but high consequence event (« Black Swan ») is paramount. The mistake often made is to apply probabilities without considering the dependency on the path or in more technical terms as the physicist Ole Peters has shown time and ensemble probabilities are not the same. Kelly and Thorp also understood this crucial difference.

Coming back to the original question, what’s the potential analogy with sport training?

First it’s not hard to see that the human body, made a trillion of cells and sub-interacting parts, fits the definition of a complex system. We have all experienced the highly non-linear response of the human body – for example a small dose of a chemical may act as a cure while becoming a poison at higher dose – think wine or Brazil nuts!

Second, sport injuries follow a fat tail distribution where some injuries have very low probability but extremely high consequence for the athlete both physically and monetarily – c. 5% of professional football players ended their career because of a sport injury, often knee or ligament related.

With this understanding, it’s not that surprising to find the barbell strategy showing up in what appears at first sight to be widely different context. “Barbeling” is optimal both in sport training and investment because it’s “anti-fragile” in a world characterized by complex systems and fat tails.

#running #trail #training #Investing #corsica

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