Imagine this situation. You have a $1,000 investment and if this year you gain 50%, your money will be $1,500 – that is $1,000 plus (50%$1,000 = $500). The next year, the economy was bleak and affected your investment, so it lost 50%. Your money is $750, which is derived from $1,500 less (50%$1,500=$750). What is the message from this case? Your brilliance could be wiped out easily by mistakes. Decision-making to avoid mistakes should be a priority.
To emphasize that message, let’s continue the story. The next year after the next year, you gain 50% and your money becomes $1,125. Comes from $750 + (50%*$750). What if, after that, you lose again 50%? How much is your money? Simple calculations – $1,125 minus ($1,125*50%) give us $562.5.
After equal down and upside for 4 years, your money is $562.5.
The Reverse Case
What if we reversed that case? The $1,000 investment lost 50% in the first year but recovered in the next period. Simple calculations give you $500 in the first year and $1,000 in the second year. The third year is the same as the first year, and the fourth is equal to the second. So your money just alternates between $500 and $1,000. It is better than the first case, but it is far from what we hope when it comes to investing or building a business.
Again, we learn. Your gain is butchered by the negative outcome. But the opposite is not true. The brilliance does not negate the negative.
The Mistake Cost a Lot
The decision-making to avoid mistakes should emphasize considering risk than expecting a gain.
If this does not alarm you, let’s make a more extreme case.
What if, in the first year you lose 90% of your capital, and in the second year you gain 90%? So this example uses 90% instead of our previous 50%. Let’s calculate. $1,000 in the first year, dragging your money into $100. For the second year, 90% gain from $100 is… $90, so in the second year, your money is $190. It’s far worse.
To bring your money back in the second year, you need…more than a 1,000% gain. The more fatal the mistake, the more horrific the consequences.
Remember Warren Buffett’s first rule? The old man says never lose your money. The foremost rule in business and investing is to preserve your capital or asset.
Charlie Munger: Decision-making to avoid making mistakes is not an attempt to become smart.
Asked by a journalist what the factor behind Charlie Munger’s success in investing was, the Vice President of Berkshire Hathaway answered, “It is simple. Because we aren’t trying to be smart, we are just trying not to be stupid. ” Charlie Munger and Warren Buffett both missed out on many spectacular gains, including the dot-com bubble, big tech like Amazon and Google, cryptocurrency, and Tesla.
Warren Buffett responds with ease, “We will miss a lot again in the future.”
Though they miss a lot of potentials, Munger and Buffett are still the best investors in history. How?
Simply avoid unnecessary risk and am not attempting to be smart. They know that the mistake cost a lot.
Read also: https://satriadigja.medium.com/charlie-munger-mental-model-how-to-reverse-problem-solving-67a9aeea5be8
Lionel Messi and Cristiano Ronaldo Once Again.
The decision-making to avoid mistakes is underestimated due to its lack of sensation.
But, why does nobody talk about this?
Because it is boring. The mainstream media enjoys discussing extraordinary stories and miraculous biographies. The world likes to tell you about Cristiano Ronaldo, the son of a part-time gardener. A boy who played football in a little street in Madeira, Portugal, or Lionel Messi, a poor boy from Rosario, Argentina.
Both are now the top-paid athletes. Their salaries could even dwarf the GDP of a small nation like Tuvalu. Or, if you like basketball, you want to hear about Giannis Antetokounmpo, who spent his childhood selling shoes in Athens, Greece. Now the Greek freak is the most expensive player in the NBA.
But, how many boys become Lionel or Cristiano?
How about Jeff Bezos and Steve Jobs? Both are known for their inventions. They conquer the world from their garage.
But, how many people who work in the garage do end up like Steve or Jeff?
Skill plays an important role, but luck plays a bigger one.
Warren Buffett once said that he is lucky because he is American, white (I’m sorry, not to be racist), and has a connection with Washington.
Some of us were not born like Warren or Gates.
The moral? It is okay to be ordinary since the ordinary can build wealth through compounding investments. Just do not make a fatal mistake.
The Crypto and Tesla.
Career, Investing, and Business: The Practical Aspect.
So, now, how do we incorporate all this stuff into our investing decisions or business strategy?
The answer is simple, do not take excessive risks. In investing, try to pick a company with an economic moat or durable competitive advantage. It should be a priority instead of picking a company that is really hot, like Sidney Sweeney. You should choose safe over hot.
Choosing Google, Microsoft, or Apple is a good idea – or Visa, instead of hot stocks like Tesla, or cryptocurrency. You may envy the gains that they make, but we do not seek brilliance; we seek safety, but still, grow.
Read also: https://investingdeck.com/the-margin-of-safety-why-value-investor-miss-tesla/
A friend of Giannis’ who sold the shoes in Athens may be still poor today. Great chance.
A friend of Lionel Messi or Ronaldo may still be in their hometown.
Some entrepreneurs, like Jeff or Steve, maybe still in their garages today.
The media just did not tell you about them.
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