"Superficially I think it looks like entrepreneurs have a high tolerance for risk, But one of the most important phrases in my life is 'Protect the Downside'"
-Sir Richard Branson
Richard Branson is aware of the mysterious power in an non-linear asymmetrical equation. He didn't give a blanket admonishment awash in hidebound conservatism. Branson's experienced observation relates his formula as a successful entrepreneur and self-made billionaire. Awareness of the equation - convex or concave - is the heart of long-term growth. Why? Because awareness is step 1 when it comes to harnessing optionality. Awareness lets you "buy" more convex options - where you can only lose as much as the option costs. Asking will allow you to avoid concave options, protecting yourself from harm. If the downside is protected then the upside will take care of itself. With the downside protected you can live to fight another day. Branson's sanguine aphorism adumbrates this simple truth. It is why he has had such success.
The payoff or harm of an option is not quantifiable beforehand. The binary choice - A or B, 0 or 1, convex of concave - is all we can hope to answer. For instance, the choice 'should I speed on the freeway?' illustrates this point. On one hand, by speeding you can get home faster by every MPH you go over the speed limit. On the other hand, for every MPH you go over the speed limit the risk of a serious car crash goes up until it becomes 100%. This is what I mean by concave options - small known gain vs huge unknown loss. Look at the extremes. Getting home faster vs serious car crash. It's a no-brainer. Why pick up pennies in front of a steam roller?
Over time, these innocuous choices add up to either a debit or a credit on your life account. Like a personal balance sheet: Assets - Liabilities = Equity. Equity is either positive or negative. The decisions we make accumulate, bringing our balance sheet up or down. Some payoffs are huge, the sky is the limit. The majority have little to no effect and still others make us pay huge. This equation doesn’t only apply to money either. Indeed, money and finances are the smallest aspect. Love, family, intelligence and fulfillment are colors used to paint your life's canvas.
Every decision has some degree of optionality baked into it. Many convex options don't cost a cent but - as a general rule - do cost something: time and/or effort. Think of reading a book. Beyond the small nominal price, the cost is the time spent reading and processing it. That’s it, it can never be more than that. Yet the upside is limitless. There are some books I’ve read that had a profound effect on me. They illuminate my view of reality like a fecund supernova. It's true that most have a mild to null effect. Yet every chance I have to read something that can shift my small window to this world is a chance worth taking. As long as you perform convex options, there is no need to worry. Good things happen; they always come, sometimes out of the blue. You can never know beforehand which will be that magic ticket into the stratosphere. If you knew beforehand, then there would be no need to perform the option. As Fredrich Hayek wrote, "The mind can never foresee its own advance." It's a paradox and we're trapped right in the middle. The more we want to control our fate, the more we end up 'selling' options for a small gain. The specter of calamity dangling like the sword of Damocles a hairs breath away. Control of upside is an illusion. The secret to capturing that unicorn is to put in the work, do the hard thing, sacrifice and make the extra effort. It's only through convex actions can one hope to be like "he on honeydew hath fed and drunk the milk of paradise"
Flâneur (pronounced: ), from the French noun flâneur, means "stroller", "lounger", "saunterer", or "loafer". Flânerie is the act of strolling, with all of its accompanying associations.
Have no plan. Court serendipitous moments. Leave yourself open to chance then have just enough brains to be able to seize the better path, using that stellar vision utilizing hindsight - always 20/20. Steve Jobs has famously said that's its only when you look back that the dots will connect. But, what if there was a way to at least give yourself the greatest amount of dots to connect into a meaningful pattern? Surely there are more constellations in the Milkyway than in the empty vacuum between galaxies.
The most successful flaneurs do not leave everything up to chance. They are masters of giving themselves the best opportunities. When given multiple paths to an unknown future there must be some default selection mechanism, some method to the madness. Experienced venture capitalists, become more artists than scientists. Yet they still have a basic framework with axioms that they use to uncover as many stones as possible. One can be right for all the wrong reasons, and inversely wrong for all the right reasons. Iteration is what distinguishes the wheat from the chaff. Time shakes all fruit loose, low hanging and high...
1) Only gather convex options. - The most important rule by far. Do that which has short term pain with the potential- not guarantee- of long term gain. This asymmetrical equation has made kings out of paupers and prostrated history on bended knee to the man who has grasped this from the history books. One cannot lose long term on this side of fate. But because this is true the inverse is also true. Tragedy sprouts from concave fertility. It has turned emperors to beggars and empires to ashes. She is a cruel mistress, quick in the sack followed by a knife in the heart. The concave island shelters and breeds the black swan.
2) Diversity is rewarded. Its the freest option there is. - All things being equal, diversity is using optionality on optionality. Its having a hand in all your convex options at once. No need to settle. Simply see that which pays the most benefits then select. No foresight necessary. It allows one to dip your toes into all the pools before selecting which one to dive headfirst into. Its also free. No opportunity cost. Just select, take action then take a different action rather than the same again. This is how mountains get moved. You zig while others zag.
3) Hone your skill. - This is where the magic happens. Its about nudging the needle from the luck side to the skill side of the continuim. Outcomes become less dependent on chance, and more settled by ability. Cost is also reduced. A surefire way of reducing risk, is reducing cost.
4) Surrender to the infinite - Play the infinite game. Convexity allows us to brush against the infinite, and catch lightning in a bottle. Both mysterious and mystic, all who have been touched by the asymmetrical hand of god walk around forever changed. There is a new light behind their eyes. They've glimpsed the reality behind the shadows dancing on the wall. How does one go back and tell the prisoners still chained? Impossible. As Morpheus says to Neo, "I cannot talk about it, it must be seen to be believed."
Every moment is an active one. A chance to turn it all around in either direction. We see it everywhere, everyday. Castles made of sand melt into the sea eventually. The surrender to the universe is more than magical- its divine. Ephemeral. To paraphrase Lichtenstein, to that which cannot be spoken about one must perforce remain silent.
So follow these rules in this order as you tour around the vacation called existence. Let these simple rules guide your path and allow you to bask in the fortune that lady luck has desired for you. There is no other way. If it was easy then it wouldn't be hard. If it was easy everyone would do it and it wouldn't be easy anymore. For the busy beaver finds the best fallen logs and the best rivers to make his dam. While all the others toil away fighting over resources and wasting time, he is able to create where there is nothing. A true Zero to One. Move to the space between the branches. Fill the gaps between the paths being trampled by the masses. Look right when everyone is looking left. You can find the end of the rainbow.
Risk means more things can happen than will happen - Elroy Dimson
The 4 following quotes are from the book The Most Important Thing Illuminated by Howard Marks.
"Rather than volatility. I think people decline to make investments primarily because they're worried about a loss of capital or an unacceptably low return. To me, "I need more upside potential because I'm afraid I could lose money," makes an awful lot more sense than "I need more upside potential because I'm afraid the price may fluctuate." No I'm sure "risk" is - first and foremost- the likelihood of losing money."
"Theory says high return is associated with high risk because the former exists to compensate for the latter. But pragmatic value investors feel just the opposite. They believe that high return and low risk can be achieved simultaneously by buying things for less than they're worth. In the same way, overpaying implies both low return and high risk."
"There's a big difference between probability and outcome. Probable things fail to happen - and improbable things happen - all the time."
"Like opportunities to make money, the degree of risk present in a market derives from the behavior of the participants, not from securities, strategies or institutions. Regardless of what's designed into market structures, risk will only be low if investors behave prudently...Risk cannot be eliminated; it just gets transferred and spread."
How then does risk relate to optionality? Like it states above, risk would be greatest if one were to overpay for the option in question. Just as all stocks are not created equal, some quality stocks are simply overpriced to the point were there is more risk to the downside than to the upside, and some beaten down stocks are actually a bargain that carry much less risk and much more upside potential. You must choose your options carefully and view each with a sort of second level thinking. For example, exercise is a convex option, yet it is possible that you can pay too much for it - especially over time.
Imagine going to the gym and doing 1 set of bench press vs doing 10 sets. Quick question, is doing 10 sets going to make you 10 times stronger? No, of course not. In fact the most valuable set, i.e. the cheapest, is the first set. You are much better off going to the gym and doing 10 sets of completely different exercises and/or muscle groups to gain the most amount of fitness for time & energy spent. This is the essence of optionality. Yet time after time I see hulking behemoths in the gym doing the same set of arms or legs or rows over and over again - they look like the least fit humans on earth. If there was ever a contest for who could do the most heavy rows with a cable then these guys would be set but otherwise they are forming and developing completely useless muscles and motions outside of their narrow domain.
So this brings us back to the point that to get the maximum benefit from a given convex option one must pay as little as possible, and in order to pay as little as possible one must diversify or be volitant with the convex options at your disposal. Doing the same thing over and over is like slicing one pizza into smaller and smaller pieces - its just better to grow the pizza or switch to a different entree entirely.
"When everyone believes something is risky, their unwillingness to buy usually produces its price to the point where it's not risky at all. Probably negative opinion can make it the least risky thing, since all optimism has been driven out of its price...when everyone believes something embodies no risk, they usually bid it up to the point where it's enormously risky. No risk is feared, and thus no reward for risk bearing- no risk premium- is demanded or provided. That can make the thing that's most esteemed the riskiest. This paradox exists because most investors think quality, as opposed to price, is that determinant of whether something risky."
Therefore purchase convex options as broadly and as cheaply as possible. Use your time and energy wisely. Focus and the process, how to streamline getting to as many options in the smallest amount of time and energy as you can. Court randomness and look for new asymmetric bets you can place on your own future. Be endlessly curious and seek failure the read the tea leaves and find out why you failed. More knowledge equals more options. Seeing the perspectives from other people and viewed from other angles can mean the difference between a good life and a great life. Its all at your finger tips. Get out there and explore with action.
“Amor fati: this is the very core of my being—And as to my prolonged illness, do I not owe much more to it than I owe to my health? To it I owe a higher kind of health, a sort of health which grows stronger under everything that does not actually kill it!—To it, I owe even my philosophy.… Only great suffering is the ultimate emancipator of spirit, for it teaches one that vast suspiciousness which makes an X out of every U, a genuine and proper X, i.e., the antepenultimate letter. Only great suffering; that great suffering, under which we seem to be over a fire of greenwood, the suffering that takes its time—forces us philosophers to descend into our nethermost depths, and to let go of all trustfulness, all good-nature, all whittling-down, all mildness, all mediocrity,—on which things we had formerly staked our humanity.”
― Friedrich Nietzsche, Nietzsche Contra Wagner
It's still Day 1 - writes Jeff Bezos founder of Amazon at the end of every shareholder letter referring to his massive web business and (I imagine) his overall philosophy towards life. In The Start Up of You - Reid Hoffman - venture capitalist and startup founder of LinkedIn, writes to be in permanent Beta mode i.e. always be in the testing phase. So at any given moment in your life you are at ground zero. The question then becomes- where do you go from here? It begins with you at the foot of the river with almost limitless streams to follow before you. You must remain - as Suzuki so sanguinely puts it - like a beginner, where there are many possibilities and not as an expert - where there are few.
Cognitive dissonance - is the physiological theory that when presented with contradictory evidence we will do mental back flips to keep from internalizing that our perception of events don't match reality. It's a little like creative accounting, where you can add a little here, take away some there and next thing you now reality has been changed - post hoc. So we conjure up a little cognitive dissonance and voila our vision of the world is restored. Like the question in the paragraph above, instead of where do we go, why do we do this so much? Its like taking the same river over and over again even though you know it doesn't lead where you want it to go. We are all masters of cognitive dissonance, we are addicted to it. It been built into the structures- social, economic, political and educational- that form the world around us.
Being in Beta phase and asking the questions as if you were starting on Day 1 stops you from letting yourself get trapped into old, ineffective and even harmful ways of thinking - ego clinging. As seen in fixed mindset vs growth mindset, believing that your traits are fixed makes for a tough explanation when reality has a nasty way of clashing with your limited view of the world. Beta mode is a method of getting unstuck, beta mode is the growth mindset.
This is why failure is so damn good. Like a rat stuck in its cage we must test the enclosure around us. Find the strong points, the weak points and the question marks. Failure is alerting you with lights and sirens flashing where your view of reality is wrong. If you are not getting this information rich message often, then you are not failing enough and are therefore not learning enough. Learning is one of the simplest and cheapest convex options available. So many people choose not to look and learn. To get to where others aren't you must do what others won't. To not be a failure - fail often.
It's amazing how much you can accomplish when you have made up your mind to actively improve, learn and grow. It seems like you are moving at warp speed while everyone is standing still. Then everyone looks at you and remarks - 'wow I don't know how he does that, he must be a natural'. Even if you try to explain to them its simply the power of using feedback, 80/20 analysis and permanent beta mode you are able to essentially create a machine for accelerated improvement. A convex evolution of consciousness. You can become superman.
The irony is the real superman is a failure. He makes a ton of mistakes. But he is fearless, and an avid learner. Curiosity is one of the the axioms he lives by. Be curious. Be foolish. Everything that has been discovered or created was at one time uncharted. It was plucked from the opaque unknown unknown. The only way to get to this place is to embrace randomness. Seek the extreme outcomes, look for the disconfirming evidence and dive into the muck of ignorance. To paraphrase Ed Katmul one of the founders of Pixar - "the man who waits and thinks is not any smarter than the man who wades in and through action and discovery finds his way. No, they both make the same amount of mistakes. But the man of action can quickly see what he was doing wrong, and take the necessary steps to avoid those pitfalls in the future. His time is greatly shortened and he inevitably arrives at his destination sooner. Whereas the deep thinker, pondering on the shore will become attached to his cherished ideas, and will find it so hard to let them go, he wont be able to move for fear of being proved wrong."