Risk and Ruin

Risk and Ruin 

You can be risk loving and yet completely averse to ruin.  And indeed, you should.

The idea is that you have to take risk to get ahead, but no risk that can wipe you out is ever worth taking.

Russian roulette

The odds are in your favour when playing Russian roulette.  But the downside is not worth the potential upside.   There is no margin of safety that can compensate for the risk.

Playing Russian roulette with your own money

Same with money.  The odds of many lucrative things are in your favour.   But if something has 95% odds of being right, the 5% odds of being wrong means you will almost certainly experience the downside at some point in your life.  And if the cost of the downside is ruin, the upside the other 95% of the time likely isn't worth the risk, no matter how appealing it looks.

Leverage is capable of producing ruin

Leverage is the devil here. Leverage - taking on debt to make your money go further - pushes routine risks into something capable of producing ruin.  The danger is that rational optimism most of the time masks the odds of ruin some of the time.   The result is we systematically underestimate risk.   

Housing prices fell 30% last decade.  A few companies defaulted on their debt.  That is capitalism.  It happens.  But those with high leverage has a double wipeout:  Not only were they left broke, but being wiped out erased every opportunity to get back in the game at the very moment opportunity was ripe.  A home owner wiped out in 2009 had no chance of taking advantage of cheap mortgage rates in 2010.  Lehman Brothers had no chance of investing in cheap debt in 2009.  They were done.

Survive to succeed

I take risk with one portion of my own money and am terrified with the other.  This is not inconsistent, but the psychology of money would lead you to believe that it is.  I just want to ensure I can remain standing long enough for my risks to pay off.   You have to survive to succeed.   The ability to do what you want, when you want, for as long as you want, has an infinite ROI.

You have to give yourself room for error.  You have to plan on your plan not going according to plan.

The best way to achieve felicity is to aim low.  (Charlie Munger)