Avoid Multiplying by Zero

The Sketchbook of Wisdom: The first print of my new book – The Sketchbook of Wisdom – is almost 90% over, and has already been bought across 30+ countries within 2 months of its launch. Click here to get your copy today. Send me an email at vishal@safalniveshak.com if you wish to place bulk orders.

* * *
Peter Bevelin, in his wonderful book “All I Want To Know…” tells the story of Napoleon’s mother, Letizia. She couldn’t understand why Napoleon should take on the British since things were going so well. So, she sold all her French holdings and exchanged them for British pounds.

Why? She reasoned, if her son won, she should have a good life in the victorious nation. But if Napoleon lost, she would not be wiped out but still be ok since she had the pounds. She hedged against the possibility of facing a zero.

Letizia’s story is the perfect example of how to arrange our affairs in life to protect against the downside.

“Anything times zero is zero,” said Warren Buffett, “and I don’t care how good the record is in every other year if one year there’s a zero…Charlie and I have seen guys go broke or close to it because 99 of 100 of their decisions were good, but the 100th did them in. “

Buffett uttered these words in Berkshire’s 2007 annual meeting which was a year before the global financial crisis blew up investors’ money.

The benefit of looking at the downside or what can go wrong is efficiency, writes Bevelin in his book –

Take investments as an example – If you first eliminate what doesn’t work or what won’t achieve what you want, you don’t have to spend a lot of time and attention analyzing the company.

If there is a huge downside – for example, a catastrophe risk of the key factors that are needed for success aren’t there or any other disqualifying factors like no sustainable advantage, bad and untrustworthy management of something else – just say ‘no thank you.’

Howard Marks wrote this sometime in 1990 –

The best foundation for above-average long-term performance is the absence of disasters. There will always be cases and years in which, when all goes right, those who take on more risk will do better than we do. In the long run, however, I feel strongly that seeking relative performance which is just a little bit above average on a consistent basis – with protection against poor absolute results in tough times – will prove more effective than ‘swinging for the fences.

So, the important mantra of sensible investing is – If I avoid the losers, the winners will take care of themselves.

A Few Stories You Shouldn’t Miss

• From Dutch Tulips to Internet Stocks, How to Spot a Financial Bubble (WSJ)
• 4 Investing Lessons from David Swensen (Of Dollars and Data)
• Valuations, Sentiment & Bubbles (Barry Ritholtz)
• How to Lose Money When the Stock Market is at All-Time Highs (Ben Carlson)
• What can we learn from listed vaccine makers (Anand Sridharan)
• Does India suffer from a collective optimism bias? (Mint)

Meditations

The story of mankind is in you, the vast experience, the deep-rooted fears, anxieties, sorrow, pleasure, and all the beliefs that man has accumulated throughout the millennia. You are that book.

~ J. Krishnamurti

You never really get over the loss of a beloved. You learn to live despite it.

~ Ruskin Bond in his autobiography, after his father’s demise

A Question for You
One of the side effects of the second wave of the pandemic in India has been panic buying and hoarding – including essential medicines and oxygen cylinders. But the problem with such buying – or buying much more than you need – is that it doesn’t leave enough for the next needy person, or the next. Worse, it saddens the heart to see people trying to make a quick buck off someone else’s misfortune.

My hope is that this crisis teaches us that our own actions affect so many others and that our actions have ripple effects, sometimes unintended, on many others.

So my question for you today is – Have you assessed the ripple effects that your next action may have on others around you?

* * *
That’s about it from me for today.

If you liked this post, please share with others on WhatsApp, Twitter, LinkedIn, or just email them the link to this post.

If you are seeing this newsletter for the first time, you may subscribe here.

Stay safe.

Regards,
Vishal

* * *
The Sketchbook of Wisdom: The first print of my new book – The Sketchbook of Wisdom – is almost 90% over, and has already been bought across 30+ countries within 2 months of its launch. Click here to get your copy today. Send me an email at vishal@safalniveshak.com if you wish to place bulk orders.