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John Authers has been blogging from a CFA conference in Vancouver this week and had this post the other day about Nassim Nicolas Taleb's presentation that I was slow to find.

Taleb had a couple of interesting thoughts about diversification. As quoted from the Alphaville post, "Diversification doesn’t work. You might need as many as 12,000 companies before it truly works."

Up front I should say that I view this differently than he does in this comment.

I take his comment to mean that he thinks owning the broadest of index funds is how to diversify and so buying the world makes the most sense, in this context. This is the crux of the passive indexer's argument of how to invest.

Of course this assumes the investor is interested in a diversified portfolio. As I read these comments about diversification I think about the first time I saw him (which was on the Connie Mack show) and he said to put 85-90% of your money into t-bills from around the world and go berserk (my word not his) with the remainder which implies taking a very undiversified approach, generally risk adverse but not a diversified equity portfolio.

Based on what I know of him (which may not be much) I would think he would prefer the mostly t-bill with a little bit of en fuego approach which I find to be far more interesting to ponder. If you had 90% of your money in t-bills, what would you put the 10% into?

The other nugget I found particularly interesting even if not new was the general idea, I am paraphrasing here, that volatility is manageable the vast majority of the time, more than the "than the predicted two-thirds of the time." But when volatility is not manageable is when people come unglued.

I don't necessarily think of volatility in the same way as he expressed it but it obviously rings true in that most of the time market chugs along smoothly (it has an up year close to 3/4 of the time) but people get very upset when the big declines come and obviously most folks don't see it coming.

It is this sort of thing, seeking out warnings like the 200 DMA (or similar) or the inverted yield curve, that becomes very important, as I see it anyway. They provide warnings of potential problems. This is a big focus of my practice and my writing. They will never let you quantify what might be coming but chances are you don't need quantify, you'd be happy enough to avoid it, or some of it anyway. If you know people freak out when the market rolls over into bear phase doesn't it then makes sense to watch out for when a bear phase might be starting?

Some obviously say no but not me.

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