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How to Manage Risk of Randomness in Investing

The Sketchbook of Wisdom: Did you get your copy?

Get your copy of the book Morgan Housel calls “a masterpiece.” It contains 50 timeless ideas – from Lord Krishna to Charlie Munger, Socrates to Warren Buffett, and Steve Jobs to Naval Ravikant – as they apply to our lives today. Click here to buy now.

A Few Ideas I’m Thinking About

Here are a few ideas I have been thinking about over the last few days.

How to Manage Risk of Randomness in Investing

“All of life is a management of risk, not its elimination,” writes Walter Wriston, former chairman of Citicorp.

Randomness is the fabric that weaves the interaction of everything around us. Since you can’t remove randomness from our affairs, you can’t get rid of the risk also. Peter Bernstein in his book Against the Gods writes –

The essence of risk management lies in maximizing the areas where we have some control over the outcome while minimizing the areas where we have absolutely no control over the outcome and the linkage between effect and cause is hidden from us.

What does that mean to you as an investor? It means you need to avoid the game of regular dice and look for the loaded dice. In other words, you should own those stocks/investments where your knowledge (in-depth research) and expertise make the environment less random.

Once you have taken care of randomness, the second and more important thing to remember is to minimize the impact, should randomness strike. This means building a ‘margin of safety.’ The greater the potential impact, the larger the margin of safety you may need.

Here’s Warren Buffett explaining the idea in very simple words –

If you understood a business perfectly and the future of the business, you would need very little in the way of a margin of safety. So, the more vulnerable the business is, assuming you still want to invest in it, the larger margin of safety you’d need. If you’re driving a truck across a bridge that says it holds 10,000 pounds and you’ve got a 9,800-pound vehicle, if the bridge is 6 inches above the crevice it covers, you may feel okay, but if it’s over the Grand Canyon, you may feel you want a little larger margin of safety.

Why Envy is a Really Stupid Emotion

Comparing yourself to others is a perfectly normal human instinct. It’s like comparing notes in a book club – you want to know what everyone else is talking about and how they’re feeling, so you can join them in the conversation. But this comparison isn’t always positive. Some people are more successful than others, some have more money than others, some look better than others – and it’s easy for these differences to lead us into envious rages when other people seem to be doing better than us at something we care about (like making money or looking good).

Charlie Munger calls, envy as a “really stupid sin because it’s the only one you could never possibly have any fun at. There’s a lot of pain and no fun.”

I believe it’s stupid to be envious because of two more reasons. One, envy leads us to want things (or people) for the wrong reasons. We want it because someone else has it, not because we need it.

Two, when we are envious of others, we want just those parts of their lives that look good – high net worth, big house, popularity etc., while not also wanting their hard work, sleepless nights, insecurities, mistakes, tragedies, sorrows, loneliness, injuries, etc.

By separating desire from demand, we can detach from our envy and instead be grateful for what we already have.

The next time you feel envious, remember that the root of this emotion is feeling like you don’t measure up to someone else. This is a natural part of life, but it’s not healthy or productive. Especially when you are an investor.

Re-Reading Good Books is a Great Idea

The books we read are important because they become part of who we are. They give us ideas and inspiration, help us understand the world around us, and help make sense of our own lives. Books can be so much more than just entertainment or escapism — they can be an invaluable tool for growth and learning.

It’s rare these days to have time to really think deeply about books and ideas. We are bombarded with information, busy with work and family, social media and technology — and even when we’re not doing anything else at all. So it’s important that you re-read good books from time to time if only so that you can remember what they taught you in the first place.

Re-reading is an exercise in deepening your understanding of yourself and the world around you. When we re-read something, we see it from a different perspective, and that can help us see things we might have missed the first time around.

Re-reading books is great for multiple reasons –

  • You re-learn ideas that you learned the last time you read the book
  • You learn new ideas you missed the last time
  • You get a chance to re-look at how you processed a given idea in the past compared to now

Someone asked on this tweet about the book I have re-read the most. It is How to Stop Worrying and Start Living, closely followed by Poor Charlie’s Almanack.

Chop Wood, Carry Water

I recently published the video version of the chapter ‘Chop Wood Carry Water’ from my book The Sketchbook of Wisdom.

You may watch the video here and check out the book here.

Focus on What’s More Important

Some equations of life I try to live by and that have helped me through my struggles, internal and external –

  • Observing > Seeing
  • Listening > Hearing
  • Health > Wealth
  • Compassion > Anger
  • Kindness > Wisdom
  • Love > Hate
  • Forgiveness > Vengeance
  • Truth > Facts
  • Empathy > Judgement
  • Giving > Receiving
  • Courage > Intelligence

A Note from The One Percent Show

Vinod Sethi said this in the second episode of The One Percent Show as one of the lessons he learned early in life –

When people ask me what books I read, or books I recommend reading, I ask them to spend some time listening to their inner voice, their inner guide, their inner compass. It is out there alive and kicking and people should try to listen to it as much as they would like to read other things.

I am not discouraging people from reading other things. I am not saying that, but you need to combine that with what works for you.

Quotes I am Reflecting On

“When you are eighty years old, and in a quiet moment of reflection narrating for only yourself the most personal version of your life story, the telling that will be most compact and meaningful will be the series of choices you have made. In the end, we are our choices.”

– Jeff Bezos

“If you would know who controls you see who you may not criticise.”

– Tacitus

Photo of the Week

I love clicking photos, and would be sharing a few from my collection here over the next few weeks.

The one below is from Feb. 2017, and I clicked this during an early morning walk at the Marina Beach in Chennai. I love watching the rising and setting of the Sun from beyond the horizon, and if I am at a place that offers such a view, I make it a point to be there to witness it.

That’s all from me for today.

If you know someone who may benefit from today’s post, please share with them.

Stay safe.

~ Vishal

P.S. Check out the Safal Niveshak Prime Membership and unlock access to exclusive members-only content, special ebooks, transcripts of my podcasts, notes from the books and other timeless resources I am reading, curated content that I am consuming and learning from week after week, and special members-only discount on my other courses and books.

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