Nassim Nicholas Taleb stopped by the Squawk Box set on Tuesday morning. I have written about Taleb several times on my blog. Most of what he has been talking about lately pertains to the financial system’s blow up or melt down or whatever we should be calling it.

However I have been far more interested in his ideas about how individuals should take risk in their portfolios or perhaps more correctly how not to take risk. He said being in cash is an investment and a lot of people don’t understand that. He has a theory of being 85-90% in cash and then swinging for the fences with the remainder. He specifically said “don’t trust the market with what you cannot afford to lose.”

He did say this time, which I had not heard him say before that with what you don’t want to lose (meaning the 85-90%) you may need some inflation protection, some gold or some hard assets.

He quoted his grandmother as saying have a lot of money in the bank and don’t have a lot of debt and he assumed that everyone’s grandmother told them that, which might be true but he said these lessons were lost. As a result of these lost lessons people will become fed up with the stock market and come to longer rely on financials assets. We will “de-financialize” the economy he says and that even making a living in the financial industry will go away.

When I first heard him talk about the 85-90% concept he talked about having the money you cannot lose in t-bills from various countries, presumably not making too large a bet on any single country. SPDR has an ETF for this that trades under ticker (NYSE: BWZ [1]) and iShares has something similar under ticker (Nasdaq: ISHG [2]). And gain the remaining 10-15% would be aggressively invested.

This concept was first put forth to me in a different context and different strategy many years ago. Apparently there was an extended time in the 1990s where shorting Nikkei futures with 2% of the portfolio delivered the same result as a properly diversified equity portfolio of domestic stocks. I can’t vouch for the accuracy of the concept but that is not the point.

For a properly diversified $100,000 portfolio an average return might be $10,000 for a year. If the portfolio can make the same $10,000 by only risking $2000 it would be taking almost no risk. So expanding it a little to Taleb’s 90/10 idea putting 2% each into five stocks with the potential to double could yield 10% for the entire portfolio plus the t-bill interest. I am not saying picking five stocks that will double is easy, in fact I doubt I could do it but we do know where to look. Who would be shocked if the worst of the financial stocks doubled again with no fundamental justification? In the next bull market cycle there will be some tech stocks that double, some smaller mining stocks and so on. You know where to look for stocks with the potential to double and perhaps using options, which Taleb uses, give a better chance for success in a manner of speaking. In assembling a group of names with the potential to double perhaps the average return works out to 50%. That $5000 plus the t-bill interest could be close to a “normal” stock market result with much less risk taken.

I am not going to invest my money or my clients’ money with the 90/10 philosophy, I think it is actually more difficult to get that much return out of such a small part of the portfolio but the concept is very constructive in terms of exploring how to allocate risk in your portfolio and understanding that often a large part of your return will come from just a few stocks. I typically maintain 40-45 stocks in client accounts, if you have a number similar to me then chances are in a flat or up market one or two of those 45 will double but it may not be the two you would ever expect.