GAMESbrief’s Black Swans

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In December 2011, one of my “Black Swans” came good. Several people have asked me to explain what a Black Swan is. This post will explain what it is, and help you understand why I run GAMESbrief the way that I do.

Channelflip – my first successful Black Swan

Channelflip, an online video business in which I had a small equity stake was acquired by Shine, the television production business owned by News Corp and run by Elisabeth Murdoch. I consulted quite heavily to the founding team of Wil Harris and Justin Gaynor in the early days of the business. I helped them determine strategy and rapidly experiment with the different ways of making money in their fast-changing world of online video. Justin was kind enough to give me a testimonial to promote How to Publish a Game.

“Meeting Nicholas Lovell was the most significant turning point in the development and understanding of our business. Having been initially sceptical about using consultants, our concerns were blown away due to his rigorous, thoughtful and sophisticated analysis of our sector and business model. It helps enormously that Nicholas has got such terrific experience of all sides of the business world from finance to technology to startups. His work transformed the way we operate and crystallised our strategy. I really couldn’t recommend his services enough.”

I’m delighted that I helped the company in the early days, and equally delighted that the company had a successful exit. Channelflip have validated my Black Swan strategy.

What is a Black Swan?

The term was coined by trader and author Nassim Nicholas Taleb in his book The Black Swan published in 2007. I urge you to buy the book (although it suffers from Taleb’s self-indulgence and an insufficiently ruthless editor) but if you can’t be bothered, just read my review on GAMESbrief.

A Black Swan is something unpredictable, with enormous impact, that everyone says is obvious in retrospect. The credit crunch is a classic Black Swan. The consequences of Hurricane Katrina too. They are high impact, rare events that can’t be predicted.

But they can be planned for.

Taleb argues that taking a “middle risk” approach is the worst of all possible worlds. By excluding the highest risk opportunities, you are still exposed to the random vicissitudes of the world – natural disasters, man-made disasters or, more prosaically in the case of business, the failure of a business model or competitive disruption – but you don’t have upside exposure to them.

In Taleb’s world of high finance, his trading strategy is to take 85% of his money and put it in the safest place he can find. Historically, this has been in US government bonds, also known as T-bills or Treasuries. The fact that these may no longer be regarded as “risk-free” is a matter for much smarter minds than GAMESbrief’s.

The remaining 15% he invests in high risk areas: uranium mines, drilling for oil, maybe backing a pop star or a novel or a movie. Anything where the rewards for success are potentially stratospherically high.*

The results look like this:

• In a bad year for Taleb, the market performs well. His T-bills plod along while his competitors benefit from heady returns in the equity markets. None of his 15% investments come good. He underperforms.
• In an OK year for Taleb, one of his Black Swans comes good. He strikes oil, or Hollywold gold, or whatever. His Treasuries have done well. He matches the market, or maybe slightly outperforms.
• In a great year for Taleb, disaster strikes. The credit crunch. Black Monday. Hurricane Katrina or the Kobe earthquake. His 15% don’t do well, but his Treasuries rise as everyone else flees their risky investments into a safe haven. While the equity markets collapse, Taleb’s investments rise. He outperforms massively.

The heart of this strategy is to say: bad things will happen, but I can’t predict them, because no-one can. I want a strategy that enables me to do OK in good times, maximise my chances for getting lucky and give me some protection if it all goes to hell-in-a-handbasket.

Running my life according to the Black Swan

I can’t exactly run my life according to Taleb’s theory, because it is hard to find the working equivalent of  risk-free investment. Here’s how I do it:

My consulting and masterclasses are my 85%. They pay the bills, keep me active, involved with clients and in the flow.

My 15% can be anything that I fancy. Right now, they include:

• Equity stake in nDreams
• Equity stake in Channelflip (sold to Shine in December 2011)
• GAMESbrief itself
• The freelance database on GAMESbrief
• The book How to Publish a Game
• The GAMESbrief Unplugged series (Volume 1 and Volume 2)
• The book 52 Game Design Secrets (work in progress)
• The book 50 questions you should ask when raising venture capital (in association with Nic Brisbourne)
• A book proposal on what the games industry can teach other industries (in submission to publishers)
• Two novels: Dirty Money, about high finance, european gangsters and stock market crashes and Kidnap, (working title, obviously) about a totalitarian London
• A comic book about superheroes with a twist
• A website about the quirky history of London at www.lovellslondonlist.com (very early days)
• A website about sailing with kids that I hope to turn into a self-published book one day (www.havekidswillsail.com)
• Probably some others that I have forgotten about.

I’m obviously not pursuing all of these with equal intensity. The point about Black Swans is that you can’t predict them, but equally, success comes from focus. I’m trying to find ways to spread myself thinly while also giving projects the maximum chance of success by giving them the attention that they need.

I’m not saying that this strategy is for everyone. I am saying that when luck is the biggest determinant of success, it makes sense to work really bloody hard to put yourself in places where you can get lucky.

That’s the heart of the Black Swan theory for me.

* Note that I’ve been living by this strategy for so long that I may have started to backfill Taleb’s investments with my own ideas. So if you want to be sure of his trading, please read his book. Don’t take my word for it.

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