Master Your Business Risks Using the Barbell Strategy
Featuring the great Nassim Nicholas Taleb
Nassim Nicholas Taleb is a wealthy ex-trader turned philosopher, mathematician, and best-selling author. His writing is all about uncertainty and smart risk-taking.
Since he’s allergic to intellectualized bullshit, Taleb’s tips are as practical as tips can get. They derive from years of empirical evidence followed by deep reflections that took place during slow walks and long dinners.
In particular, he popularised the Barbell Strategy after using it to financially thrive during the 2008 recession, when many others collapsed. The secret? Turn uncertainty into an ally.
What exactly is The Barbell Strategy?
Every business endeavor has a risk spectrum ranging from risk-free to highly risky. Between these two extremes, you have a large middle ground where risk is moderate. Now imagine this risk spectrum as a barbell.
Illustration of the barbell metaphor.
The best way to lift up your risk barbell is to hold it by both extremities, never by the middle. If you tried bench pressing or deadlifting at the gym, you’ll know what I’m talking about.
Unlike physical weight, however, you don’t want your capital to be evenly distributed. Instead, you want to put most of your resources on the low-risk side. That way, you protect most of your business from potential ruin and, at the same time, you create a few volatile opportunities that can lead to massive paydays.
What makes the Barbell Strategy so relevant?
Money, real money, is in risk-taking. Almost every billion-dollar company in existence began as a crazy gamble — Google, Amazon, and Tesla are decent examples. But it’s not just companies. The same pattern applies to early adopters of new technologies. Think Bitcoin millionaires and YouTube stars.
The downside? Your odds of success are extremely low. For reference, 90% of startups fail and 80% of restaurants shut their doors within five years. It’s no wonder people shy away from risks.
Some avoid financial gambles altogether: they never start a business or invest in the stock market. Sure, they can pile up a comfortable amount of savings over the years, but with inflation, they can only get so far.
Others seek shelter in the middle of risk barbell, which can be worse than playing it safe. The reason for that is what mathematicians call variance.
With moderate risk-taking, the upside is never high enough to produce life-changing gains and the downside is often low enough to keep you up at night.
Say you take the moderate risk of investing all of your savings in a small local restaurant. At best, you’ll earn few thousand dollars each year. But if the restaurant goes bust, due to rough competition or a pandemic, you’ll lose all of your money. You’d be better off leaving your money sleeping in the bank.
Now, let’s reintroduce the barbell strategy.
Handling your investment portfolio like a barbell means you invest part of your money in extremely low-risk projects and the other part in extremely risky ones. As mentioned earlier, you don’t want to split your assets 50–50.
With investing, a distribution that’s 90% low-risk and 10% high-risk makes the most sense. The former can be a stable fund like S&P 500. The remaining 10% can go into risky endeavors like emerging startups and cryptocurrencies
In the worst case, you’ll be losing 10% of your money each year all while protecting the rest of your savings from inflation. Meanwhile, suffice that one, just one, of your risky investments takes off for you to reap outstanding rewards. That’s how investors become millionaires “overnight.”
Also hey, the barbell strategy doesn’t only apply to investing. It works with pretty much every business venture out there. Here’s how.
How to apply the Barbell Strategy?
First, take a step back and analyze your business. What are its safest parts? What are the riskiest ones? Draw two lists with your answers and consider them as the extremities of your barbell.
The remaining activities, those with moderate risk, are likely to be counterproductive. Ideally, get rid of them.
Now split your resources, putting the majority of your business weight on the safe side, and voilà. You just got yourself a barbell strategy.
Here are a few short examples that show how things look in practice.
Invest most of your budget in improving your main product and dedicate a fraction of your capital to innovation.
- Example: Google’s main product is its search engine which generates revenues through ads. But the company also innovates through digital tools like Google Docs and gadgets like Chromebook.
Build a strong presence on major platforms like Linkedin but keep an eye on emerging ones.
- Example: Author Mark Manson has a solid presence on Instagram and Twitter. Recently, he joined BitClout, a decentralized version of Twitter.
Build long-lasting relationships with people you already know. At the same time, invest two or three hours per month into new connections through events and platforms.
- Example: Every two weeks, my friend Kyan organizes dinner parties with friends and clients. He occasionally uses Telegram channels to hook up with fellow software developers.
Channel most of your efforts into the niche you’re comfortable with and explore new opportunities every now and then.
- Example: Kurzgesagt — In a Nutshell is a YouTube channel that explains science using compelling narration and fancy animations.They sometimes publish out-of-context videos featuring crazy thought experiments like “What if the world turned to gold?”
The stable part of your content barbell is faithful clients. They make for a low-risk source of income. On the risky side, you can publish on content platforms. Most of your pieces will flop but the ones that go viral will generate exponential gains.
- Example: Ryan Holiday is an established author with multiple best-selling books under his belt. Still, he publishes short articles on Medium to broaden his exposure and market his books.
Master the only constant
We, humans, hate uncertainty because we only see its negative side: the risk of loss. So we play it safe and avoid gambles, forgetting that the greatest opportunities arise from that very same uncertainty.
This doesn’t mean you should go all-in on every crazy bet that comes your way. Not at all. Instead, you want to take smart risks. One way to do that is to picture each business venture as a barbell.
Put one hand on the stable extreme and the other on the risky one, then push. That’s how you lift your projects up. That’s how you turn the randomness of our complex world into a powerful ally.
I’ll leave you with a badass quote from Nassim Nicholas Taleb:
“This is the central illusion in life: that randomness is a risk, that it is a bad thing.”
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Business | Psychology | Marketing — What's your favorite quote? Mine is "True masters are eternal students."