The Case for Simplicity: What Taleb and Mandelbrot Taught Me About Surviving Markets
Why the most sophisticated investors often use the simplest strategies - and why complexity is usually just risk in disguise.
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Here’s a statistic that should trouble every investor: Long-Term Capital Management employed 16 PhDs, two Nobel laureates, and some of the most sophisticated quantitative models ever built. They blew up in 1998.
Meanwhile, Warren Buffett - who famously uses a calculator and reads annual reports - has compounded at roughly 20% annually for six decades.
The difference? Simplicity.
I’ve spent considerable time studying the works of Nassim Nicholas Taleb and Benoit Mandelbrot. Their insights have fundamentally shaped how I think about portfolio construction, risk management, and the very nature of markets themselves. In my view, their combined wisdom points toward one uncomfortable truth: complexity in investing is usually just hidden fragility.
This post distils what I believe are the most important principles from their work - and how I apply them at Schwar Capital.
The Problem with Complexity
Most investors believe sophistication equals edge. More data. More models. More variables.
In my experience, the opposite is true.
Mandelbrot demonstrated something profound in his study of cotton prices, stock markets, and turbulent flows: markets are wild.
They don’t follow the neat bell curves that finance textbooks assume. Extreme moves - the kind that wipe out portfolios overnight - occur far more frequently than Gaussian models predict.
The 1987 crash. The 2008 financial crisis. March 2020.
These weren’t once-in-a-millennium events.
They were features, not bugs.
Complexity hides exposure to these fat tails. Think derivatives on derivatives. Think correlation assumptions that work beautifully until they don’t. Think models that optimise for a world that exists only in spreadsheets.
Simplicity, by contrast, keeps tail risk visible and tractable.
I can understand a concentrated portfolio of businesses I know well. I cannot understand a web of synthetic instruments whose interdependencies require a PhD to map.
Five Principles of Simplicity
Drawing from both Taleb and Mandelbrot, I’ve distilled what I believe are the core principles that should guide any investor serious about long-term survival.
1. Simplicity Protects Against the Unknown
Taleb’s central insight is this: the world is dominated by rare, unpredictable events - Black Swans.
The 2008 crisis wasn’t predicted by the models that said it couldn’t happen. COVID-19 wasn’t in anyone’s DCF.
Simple systems break less often because there are fewer moving parts to fail. A portfolio with five deeply-researched positions, clear theses, and no leverage has far fewer failure modes than a portfolio with fifty positions, various hedges, and borrowed money.
I don’t try to predict Black Swans. I try to ensure they won’t destroy me.
2. Simple Heuristics Beat Fragile Optimisation
Both thinkers reject over-fitted models. Taleb argues that optimisation leads to fragility - when conditions change even slightly, optimised systems shatter. Mandelbrot showed that markets are simply too wild for precise calculation.
3. Simplicity Preserves Optionality
Optionality is the ability to benefit from volatility rather than be destroyed by it. It’s having the capacity to act when others can’t.
Taleb’s insight here is elegant: simple structures - a cash buffer plus a few asymmetric bets - maximise upside without committing to predictive complexity. Complexity usually locks capital in. It creates obligations, covenants, margin requirements.
When markets crashed in March 2020, investors with simple, unleveraged portfolios and cash reserves could buy world-class businesses at decade-low prices. Those with complex, levered structures were forced sellers.
Simplicity is dry powder waiting for opportunity.
4. Via Negativa: Improvement by Removal
Taleb calls this the Via Negativa - the negative way. True simplicity isn’t naive minimalism. It’s the rigorous removal of everything that doesn’t meaningfully change outcomes.
In practice, this means asking different questions. Not “what should I add to my portfolio?” but “what should I remove?” Not “what new indicator should I track?” but “what noise am I mistaking for signal?”
Most investment research is addition - more data, more metrics, more complexity. The better approach is subtraction. Strip away everything until only what matters remains.
In my own process, I’ve found that a simple checklist - management ownership, return on capital, competitive moat, valuation - outperforms any elaborate scoring system.
5. Accept Markets as They Are, Not as Models Wish
Mandelbrot spent decades showing that markets follow fractal patterns - rough, irregular, and unbounded by our statistical assumptions. Volatility clusters. Returns have fat tails. Dependence structures shift.
The comforting Gaussian bell curve is a lie. It allows precise calculations but describes a market that doesn’t exist.
Simplicity means using models that reflect reality - wild randomness - rather than comforting illusions. It means acknowledging that precise predictions are impossible and positioning accordingly.
What This Means for Investment Philosophy
These principles translate into specific beliefs about how to construct and manage a portfolio.
Focus on Robustness, Not Prediction
Markets are fundamentally unpredictable. Taleb puts it bluntly: “Invest in preparedness, not forecasts.”
I don’t try to predict earnings beats, macro shifts, or market timing. I try to own businesses that will be worth more in five years under most reasonable scenarios. The focus is survival first, returns second.
Prediction is optional. Survival is not.
Respect the Power of Extremes
Mandelbrot’s fractal markets reveal an uncomfortable truth: large moves dominate long-term returns. A handful of days - often the worst and the best - determine decades of performance.
Portfolio survival therefore equals the ability to withstand, or benefit from, these extremes. This is why leverage is so dangerous: it turns survivable drawdowns into terminal ones.
In a world of fat tails, the few events that matter decide everything.
Barbell Thinking Beats Average Thinking
The barbell strategy is simplicity at its finest: most capital in extremely safe assets, a small portion in high-upside convex opportunities, and nothing in the middle.
The middle ground - the “moderate risk” investments - often provides the worst of both worlds. Not safe enough to protect, not explosive enough to transform.
Separate safety from speculation. Don’t blend them into mediocrity.
Prefer Businesses with Convexity
Convexity means limited downside with large potential upside. It’s the mathematical essence of asymmetric investing.
Simple filters for convexity (recurring revenue, network effects, no terminal fragility, strong balance sheets) beat complex models every time. A business with 90% recurring revenue and zero debt has structural convexity. A business with cyclical revenue and heavy leverage has structural concavity.
This is why at Schwar Capital I obsess over business model quality before ever looking at valuation.
How I Apply This at Schwar Capital
These aren’t abstract principles. They inform every aspect of how I manage the portfolio.
Concentrated positions: I hold few positions that I understand deeply, rather than many positions I barely know. Complexity through diversification is still complexity.
Clear theses: Every investment must have a thesis that can be stated in two sentences. If it requires a spreadsheet to explain, it’s probably too complex.
No leverage: The portfolio is never leveraged. Full stop.
Cash buffer: I maintain optionality through liquidity, ready to act when markets offer asymmetric opportunities.
Asymmetric focus: Every position targets at least 3:1 upside versus downside. This is convexity in practice.
Minimal trading: Fewer decisions means fewer errors. Activity is not progress.
Conclusion
The irony of markets is this: the more certain someone sounds, the more likely they’re wrong. The most sophisticated models often hide the most fragility. The cleverest strategies often precede the most spectacular blowups.
Taleb and Mandelbrot both point toward the same conclusion.
Simplicity isn’t a lack of sophistication - it’s an edge against uncertainty. Fragile portfolios are built by addition; robust ones are built by subtraction. Complexity hides risk; simplicity exposes it.
In a world where extreme events drive long-term returns, where markets are wilder than any model assumes, and where prediction is largely theatre, simplicity isn’t just preferable.
It’s necessary.
Dom
Schwar Capital
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Disclaimer: The content provided in this newsletter is for informational purposes only and does not constitute financial, investment, or other professional advice. The opinions expressed here are those of the author and do not necessarily reflect the views of Schwar Capital. Investing involves risk, including the possible loss of principal. Past performance is not indicative of future results. The author may or may not hold positions in the stocks or other financial instruments mentioned. Always do your own research or consult with a qualified financial advisor before making any investment decisions. To read our full disclaimer, click here.
Excellent synthesis of Taleb and Mandelbrot. The Via Negativa framing is particularly useful becuase most portfolio construction defaults to addition when subtraction actually builds robustness. The barbell aproach avoiding the middle ground makes total sense once you accept fat tails, but it takes discipline to resist the pull toward mediocrity that looks like diversification.
Some great points here. How do you view investing in index funds? Too diluted or not concentrated enough?