Relax into Discomfort

The process of learning and engaging with the craziness of the world creates trials where it is okay to make errors. When you are in an environment where you have confident control over the risk of ruin. 

It is not a big deal if things go wrong. You want to be surprised. Like a child who delights in things not going in the way they expected. You can incorporate that learning and curiously see what is going to happen when you again poke the unknown. Confident in the ability to relax into discomfort to create powerful questions. 

This is something I have to work on. I find that when you care, and like caring, it can create tension. Those I care about the most sometimes don’t get the best version of me because I care so much. When something becomes so important that nothing else matters, humour can disappear. You can lose the things you care about most because you are trying too hard. 

One of the ideas I have wrestled with is “unconditional love”. The lack of boundaries can ironically mean it is impossible to relax. I don’t like the idea of escape hatches. I think you need to do the work when things go wrong. You can’t build if you are constantly restarting. 

Returning to some basic self-care, and holding onto the ability to repair, recover, and regenerate, can increase the capacity for commitment. Awareness of the limits of temporary learning, and when retreat is necessary. 

You don’t need to learn through pain. Controlled stress is sufficient. Playing within limits, and having a good sense of what limits you are comfortable with. Part of investing is taking risks, but you are not rewarded for taking risks. You are rewarded for adding value. 

The key to a powerful timeframe is self-awareness, self-knowledge, self-love, and returning to a foundation of basics.

Regeneration

Absorbing Shocks

Insurance works on the “law of large numbers”. Unlikely events with big consequences are spread out over large groups. A small, certain, premium that can be afforded instead of a small, uncertain, chance of ruin. You can self-insure for a lot of events if you have enough capital that it won’t result in your ruin. I built my Engine the traditional way. With a salary (from a job) that was bigger than my expenses. When I started, I took out life, earning ability, and severe illness cover. The world is designed around us living hand-to-mouth with our salaries defining our capacity to take and absorb risk. To snap that connection, you need a gap. Then that gap needs to be invested, and what it earns reinvested, until your Engine can be working and earning what you need to spend. It is only with a working engine that your life choices can be gradually freed from the constraints of money making. Good ideas that are not good business ideas are still worth doing. They need to be powered by good business ideas. Merit/worth/value (a good idea) is not sufficient. At least not in the beginning. With planning, you can increase your ability to be the one who decides what has value, and what you do with your time. 

 

Going to Zero

Nassim Taleb has written about Risk in a very accessible way. His books include “Fooled by Randomness”, “The Black Swan”, and “Anti-Fragility”. He writes about risk and decision-making. In particular, he looks at tail risk. The extreme events that have never happened before, but will have a dramatic impact. Events that fundamentally change everything.  If you only look at what has happened, you assume that things are fairly controlled. That the world is like the spinning of a coin, or the roll of the dice, with varied but fixed outcomes. But it is more complicated than that. Real risk is not normal. It has fat tails, so there are more outliers (unusual observations), than would normally be expected. That is on both the upside and the downside. When normal changes, it can change dramatically. When you think through risk, you need to ask, “What makes this go to zero?”. You need to know what will destroy you, and you need to protect for those risks. Then you need to position yourself to be available for the positive surprises. Why could this go really well? You do not know that it is going to go really well. But you need to open yourself up to that possibility. Risk can't be studied purely by looking at history, even though history matters. 

Noise and Ruin

You can’t simplify risk into a simple number to fully capture the “cost” of returns. There are various measures for risk, that ask interesting questions. All of them have problems. Volatility is the most commonly used, as a measure of noise. How different the average outcome is, from the average outcome. If volatility is zero, there is no movement from the average. If sometimes it is higher, and sometimes it is lower, you are measuring the absolute difference from the average (whether below or above is ignored). If results are “normal”, you can get an idea of what the chance of an outcome being in a given range is. Another measure of risk is the probability of ruin. What is the chance that you are not going to be able to play the game anymore? The most important thing in most games is staying alive. Value is created over the long term and compounds. Survival is essential. You always need to know that you are going to be at least 5% okay, so that you can rebuild. Always have the capacity to regenerate, even in a huge disaster. Hold something back. Something that allows you to have a deep sense of security. Volatility, based on the past, can be zero right up till a point of ruin. There is no such thing as risk-free. 

Volatility is easy to measure, Ruin less so

 

Last Resort

The idea of a “Lender of Last Resort” (LOLR) brings harsh focus to the importance of liquidity. Price isn’t value. If you have stuff no one wants, the price is zero. It doesn’t matter what it is. It doesn’t matter how much you think it is worth in normal times. If you don’t have the capacity to reach normal times. The price may even be negative. You may have to pay someone to take something with long term value from you, because you simply have no option. There is nothing as dangerous as having no options. The role of LOLR is played by Governments or Central Banks. Selectively and inconsistently. Lending to institutions they don’t want to fail when no one else will. The Bank of Mom and Dad plays this role for many surface level risk takers. For the majority of people, there is no last resort. There is no one to step in. They are their own last line of defence. Risk is deeply personal.

Ask For Me Tomorrow

Terry Smith (founder of Fundsmith) explicitly doesn’t try guess the future. “The reality is that we don’t seek to predict who will win, but rather to bet on a company that has already won”. This may seem like it goes against the standard risk disclaimer… past performance is no guarantee of future results. I see the point more that winners keep on winning because they have breathing space. Success is path dependent. You need money to make money. Businesses (and people) with strong balance sheets (engines of capital) are able to have a longer-term time horizon. A fundamental rule of money is to never be a forced seller. If you have previously been successful, you can have a buffer of cash (1) for when future results are losses, and (2) that stops you being forced to sell bits of your engine when you know the price is awful. The reason winners keep winning isn’t necessarily because they are better, it is because they have the resources for when they aren’t. That allows them to focus on creating sustainable competitive advantages. One man’s mortal wound is another man’s scratch.

No Pollyanna

I have never seen a long-term track record showing sufficiently compelling evidence of any investor’s ability to time the market. Swapping in (equity) and out (cash/bonds) to predict the ups and downs. Instead, my belief in equity comes from something more fundamental. Equity is a slice of ownership in a business that is doing something creative. With management and staff who can respond dynamically to the challenges presented. Who can make the most of any situation. Solving real problems. Adapt, adjust, accommodate. The growth makes sense to me. The risk management makes sense to me. It’s not a game or crystal ball. I am close to a perma-bull. An optimist who believes it is “time in the market, not timing the market” that makes the difference. But I am not a Pollyanna. You only have to read “When Genius Failed” and “Black Swan” to understand the danger of Tails. Unpredictable, extremes that change everything. 1000 years of mediocre returns will beat several extraordinary lives, with intermittent calamity. Spectacular is over-rated. Sustainability matters. Time matters. Compounding matters.

Pollyanna - Unfailingly Optimistic Outlook