Nassim Taleb and company optionality…

Via ValueWalk:

[For a third rule] I’d say, look for companies that have optionality….Optionality means to have more upside than downside because the company has options. An “option” in this sense acts like a financial option, and a financial option is an instrument of antifragility because you pay a premium and you have all this upside and very little downside.

The companies make more from the upside of something than from the downside. Make sure the optionality is not priced by the market. And of course, go away from companies that have negative optionality.

An optionality that is priced in the market is, for example, buying energy companies and gold companies before a rally in gold. Instead ofinvesting in gold, people invested in companies that made a lot more than gold. But after a while, this got priced in. In other words, if you’re wrong on gold, you do a lot better than those who invested in gold outright. If you’re right on gold, you do a lot better than those who invested in gold.

You have to avoid the lottery-ticket effect of investing in companies that are overpriced because people are looking at the big upside.