The market can stay irrational longer than you can stay solvent.
For most people, the best way to short is to just hold cash equivalents like short-term treasuries.
eg: If you think NVDA is overvalued relative to the overall tech sector, you could short NVDA, go long QQQ.
And if you have a more opinionated trade in the same currency, eg: you think AAPL will be fine if the AI trade pops, you can do short NVDA, long AAPL.
Finally, an even more advanced version would be to go long on something else in the same sector, but which is less overvalued in your opinion. eg: Short ORCL, long NVDA.
For global currency risk (meaning on USD), You will have to hedge your shorts with a non currency long position which historically hold value during defaults/ runs etc. Assets like gold (ETFs/Gold bars) or real estate (REITs or physical land holdings) or rights to commodity revenue like oil, copper etc [1].
If the currency risk is not for USD, then mix of other currencies particularly USD would work well as as hedge.
Currency risk is independent of shorting, i.e. it is risk in Long positions as well, current may inflate faster than your position increases in value etc.
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[1] Commodity come with additional shorter term market volatility and risks - due their own supply/demand volatility and depend performance of economy.
However after assets like Gold, they will have highest correlation of returns against inflation as long the economy doesn't completely crash, because the demand for them is foundational
One of the idiosyncrasies of modern human society is that we’re pretty good at knowing how things we create or initiate can go wrong, particularly with the economy. We’re just not great at perfectly understanding the degree of risk or the probability or at what point/level it goes wrong. That’s why I’ve never really got all the chat of “economists have predicted xx of the last x recessions yadda yadda”. I’m fine with that, I’d be more concerned if they predicted 0 of the last x recessions.
If you want to sell all your tech stocks because you think that it's irrational then take your neutral position. You won't profit from stonks going up but you won't get anything from them going down either. You've isolated yourself from them.
What the quote is advising against isn't neutral positions or pulling out early during an upturn. It's about trying to time downturns.
If you want to profit from a stock going down, you need to hold inverses like shorts or selling call options / buying puts. These inverses are always short term positions, there is no such thing as a cheap long term asset that profits when stocks go down.
Basically if you want to profit from a predicted downturns, becuase you think some asset is irrationally overvalued, then you don't just need to be right, you need to be right and time it. Because it doesn't take long before you go bankrupt holding these sorts of inverses. Aka market stays irrational longer than you can solvently hold these risky positions.
The 17 year recovery time literally has nothing to do with this btw. It's all about short term.
All this to say... shorting 1-2 years early doesn't work. You don't have the patience or capital to actually maintain a short position for two years while the market goes from 1750 to 4800. You can cheaply sit out in cash, if you want, but that's not a short position. And the S&P500 hasn't seen the kind of 300% run-up over an 18 month period that Nasdaq did in the dotcom boom.
But Taleb's point is that (non-insiders) cannot accurately predict regarding individual securities (hence derivatives), but can identify over-/under-priced OTM options — and that, trading these systematically, one can suffer many repeated "small" losses that become outweighed by the Big One that eventually (yet unpredictably) hits, thus generating overall positive expected value. But, as I further understand Taleb, most people don't have the huge capital that enables such a strategy, and that doctors, lawyers, dentists, etc., are better off making money by plying their professional services and perhaps investing in index funds and the like.
Do you remember the stock market a few decades ago? Stocks once had large bid/ask spreads. Now the hft/dark pools eat it all, with 99% profit on trades. High speed, lasers and fiber optics front-running..