• Russian roulette. Say a strategy yields above-average returns for 9 years and a catastrophic loss in the 10th. This is a formula for wealth – if you are playing with other people’s money. Collect a handsome-fee during the good years and then shrug off the 10th.
You could get this profile of wins and losses by insuring levees in New Orleans. On Wall Street you get it selling naked put options, buying junk bonds or operating Long-Term Capital Management. In all these cases, the money manager succeeds by sweeping risk under the rug. Nassim Nicholas Taleb‘s preferred-name for this game is the ‘Rubin Play,’ in honor of a well-compensated executive at a bank that needed to be bailed out.
• Monkeys at the keyboard. Hand out 100 trading-terminals and after a time the operator of one will emerge as an apparent genius. Collect a fee on the monkey-feeder fund.
• Streaking. Almost any investing style – small stocks, emerging markets, momentum – will have a winning streak, lasting 5 to 12 years. At an opportune moment, compare your results with the overall market’s.
• Leverage. Genius is leverage in a rising market. This is how LBO artists get to be billionaires off mediocre portfolio skills.
• Heads I win. Be a Hedge fund manager. Pocket 20% of the gains if you are lucky, but chip-in for none of the losses if you aren’t.