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BLOWING UP

How Nassim Taleb turned the inevitability of disaster into an investment strategy.

BY MALCOLM GLADVELL

One day in 1996, a Wall Street trader named Nassim Nicholas Taleb went to see Victor Niederhoffer. Victor Niederhoffer was one of the most successful money managers in the country. He lived in and worked out of a thirteen-acre compound in Fairfield County, Connecticut, and when Taleb drove up that day from his home in Larchmont he had to give his name at the gate and then make his way down a long, curving driveway. Niederhoffer had a squash court and a tennis court and a swimming pool and a colossal, faux-alpine mansion in which virtually every square inch of space was covered with American folk art. In those days, he played tennis regularly with the bilВ­lionaire financier George Soros. He had just written a best-selling book, "The Education of a Speculator," which was dedicated to his father, Artie NiederВ­hoffer, a police officer from New York City. He had a huge and eclectic library and a seemingly insatiable desire for knowledge. When Niederhoffer went to Harvard as an undergraduate, he showed up for the first squash practice and announced that he would someВ­day be the best in that sport; and, sure enough, he soon beat the legendary Sharif Khan to win the North AmeriВ­can Open Championship. That was die kind of man Niederhoffer was. He had heard of Talebs growing reputation in the esoteric field of options trading, and summoned him to Connecticut. Taleb was in awe.

"He didn't talk much, so I observed him," Taleb recalls. "1 spent seven hours watching him trade. Everyone else in his office was in his twenties, and he was in his fifties, and he had the most energy of all Then, after the markets closed, he went out to hit a thousand backhands on the tennis court." Taleb is Greek-Orthodox Lebanese and his first language is French, and in his pronunciation the name Niederhoffer comes out as the slightly more exotic Niederhoffer. "Here was a guy living in a mansion with thousands of books, and that was my dream as a child," Taleb went on. "He was part chevalier, part scholar. My respect for him was intense." There was just one problem, however, and it is the key to understanding the strange path that Nassim Taleb has choВ­sen, and the position he now holds as Wall Street's principal dissident. DeВ­spite his envy and admiration, he did not want to be Victor Niederhoffer. For when he looked around him, at the books and the tennis court and the folk art on the walls, and when he conВ­templated the coundess millions that Niederhoffer had made over the years, he could not escape the thought that it might all have been the result of sheer, dumb luck.

Taleb knew how heretical that thought was. Wall Street was dedicated to the principle that skill and insight mattered in investing just as they did in surgery and golf and flying fighter jets. Those who had the foresight to grasp the role that software would play in the modern world bought Microsoft in 1986, and made a fortune. Those who understood the psychology of investВ­ment bubbles sold their tech stocks at the end of 1999 and escaped the NasВ­daq crash. Warren Buffett was known as the Sage of Omaha because it seemed incontrovertible that if you started with nothing and ended up with billions then you had to be smarter than everyone else: Buffett was successful for a reason. Yet how could you know, Taleb wonВ­dered, whether that reason wasn't simВ­ply a rationalization invented after the fact? George Soros used to say that he followed something called "the theory of reflexivity." But then, later, he wrote that in most situations his theory "is so feeble that it can be safely ignored." An old trading partner of Talebs, a man named Jean-Manuel Rozan, once spent an

entire afternoon arguing about the stock market with Soros. Soros was vehemently bearish, and he had an elaborate theory to ex-plain why ” which turned out to be entirely wrong. The stock market boomed. Two years later, Rozan ran into Soros at a tennis tournament. Do you remember our conversation? Rozan asked. I recall it very well, Soros re-plied. I changed my mind, and made an abso-lute fortune. He changed his mind! The truest thing about Soros seemed to be what his son Robert had once said:

My father will sit down and give you theories to explain why he does this or that. But I remember

seeing it as a kid and thinking, Jesus Christ, at least half of this is bullshit. I mean, you know the

reason he changes his position on the market or whatever is because his back starts killing him. It has nothing to do with reason. He literally goes into a spasm, and it`s this early warning sign.