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business philosophy

Failure disguised as caution

I knew a girl in college who was paralyzed by fear. She’d see a fire truck drive by and start worrying that her dorm was on fire. She’d hear about a robbery and ask people to walk her to her car. She’d study for weeks for mid-terms and literally shake in fear as she was leaving them, thinking she’d missed some crucial question. She would use hand sanitizer every few minutes.

Abby was a very bright girl. She got a good job and ended up with a great life. But despite a healthy intellect and marketable skills, she was fighting an uphill battle of risk avoidance. She was afraid of something — anything — going wrong. It’s hard to blame her. A lot of things go wrong.

But this obsession with danger made her blind to her biggest risk: being so worried about the possibility of risk that she couldn’t have reacted to a problem if it ever actually happened.

She would have been blindsided. Wiped out.

If a robber had ever jumped out of a dark alley, she would have just quaked in her shoes like a rabbit frozen in the headlights.

She wouldn’t have been able to fight back, wouldn’t have been able to land a kick to the groin, probably couldn’t have even called for help.

Risk is not a synonym for bad. Safety is not a synonym for good.

Fear is an innate part of us that helps us survive. There’s a direct reason that we fear things like darkness, heights, panthers, and lightning storms. There’s similar (if indirect) reasons that we fear abstracted dangers like risky investments, unemployment, stressful jobs, or the unknown. We know that these sorts of things can develop into worse things.

The problem with our innate self-preserving fear is that, like everything about us, it isn’t perfect. It needs to be tamed.

The market tanked a few months ago.

It’s interesting to think about what this girl would have done with her investments. (I’m 100% positive that she doesn’t manage her own stocks and retirement funds — Edward Jones is made for these sorts of folks — but let’s pretend she does).

First, she would have only held Vanguard index funds. They’re a very logical sort of investment. If a Vulcan would invest, he’d probably buy VFINX.

She would have felt very good about her investments, until after losing 25% or more within a few days, she would have sold everything in order to mitigate risk.

Lots of people sold at the bottom – lots.

I know this, because at the bottom, a lot of people bought. And there has to be someone selling in order to buy. The market recovered within a couple months (mostly due to injection of liquidity from the central banks) and everyone who bought then, right when the fearful investors had lost 25%, are now 25% up.

Buying at the bottom never feels like buying at the bottom. It means you’re buying at the end of a declining line, and you don’t know if it’s actually the bottom. A 25% loss could be the beginning of a 100% loss. You never really know.

Is it a risk to buy during a crash? Absolutely. You could lose everything you put into it.

That’s why, during a market crash, the resulting departure from stocks is known as the flight to safety.

So why would you ever buy the crash? Because danger is sometimes worth it. It’s worth it because most people aren’t doing it, and whenever there is scarcity that means there is opportunity.

The Abbys of the world did not buy the crash. They sold at a loss for cash – which was then instantly devalued further by the injection of liquidity and massive stimulus by the government.

Safety — in some forms — is actually failure disguised as caution.

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