Nassim Taleb, New York Times best-selling author of The Black Swan: The Impact of the Highly Improbable, stopped by The Motley Fool to discuss his newest book, Antifragile: Things That Gain from Disorder. He believes that one of the biggest mistakes analysts make when looking at complex financial structures such as the Dow Jones Industrial Average (DJINDICES: ^DJI ) or the S&P 500 (SNPINDEX: ^GSPC ) is "mistaking the cat for the washing machine." He promotes the idea that markets are organic systems, not machines to be fixed, and if you attempt to remove all volatility from the markets through artificial mechanical fixes, such as the recent quantitative easing enacted by the Federal Reserve, then you remove all the healthy stressors from the market that allow it to learn from its mistakes organically, and heal itself.
When the market is no longer able to heal itself organically from the small-scale threats and pitfalls, unseen risk accumulates in increasingly large amounts over time, until massive market crashes occur. The results are not only catastrophic, but lead to a dramatically-prolonged recovery. During the Wall Street crash of 1929, for example, the Dow lost 89% of its value, and it took 25 years to recover those losses.
In this portion of the interview, we hear Nassim explore in-depth the reasons why uncertainty and volatility are beneficial in a number of financial situations, where having stressors that force continuous adaptation to current conditions is the healthiest situation one can have.
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