Admission Open for My Worth Investing Workshops (Offline): I’m excited to announce admissions to my upcoming in-person worth investing workshops within the following cities:
- Bengaluru – Sunday, thirteenth July 2025
- Hyderabad – Sunday, twenty seventh July 2025
- Mumbai – Sunday, tenth August 2025
Click on right here to know extra and guide your seat.
Seats are restricted in every metropolis. The primary 20 contributors can declare an early chicken low cost.
Whereas flipping by means of a couple of of my previous notes, I stumbled upon a thought from Nassim Taleb that struck me once more with its knowledge. He was explaining the idea of path dependence, which is a phenomenon the place outcomes usually are not only a operate of current circumstances, however closely formed by the sequence of occasions that preceded them.
Taleb used a metaphor to clarify this concept:
Ironing your shirts then placing them within the washer produces a distinct consequence from washing your shirts first, then ironing them. The reader can both belief me on this, or attempt the experiment with each sequences on the subsequent Sunday afternoon.
He then utilized that very same thought to cash:
Assume that your capital is round a million {dollars} and you’re concerned in hypothesis. Making 1,000,000 {dollars} first, then shedding it, is markedly completely different from shedding 1,000,000 {dollars} first, then making it.
Within the first path (make, then lose), you’re not less than alive to struggle one other day. You might find yourself with much less, however you’ve tasted survival. Within the second path (lose, then make), you could by no means even get to the “make” half. As a result of shedding early can depart you bankrupt, damaged, demoralized, and most significantly, unable to remain within the recreation.
And in the event you’re out of the sport, the remainder of the trail now not issues.
That is the place Taleb’s perception dovetails with Warren Buffett’s much-repeated Rule No. 1: “By no means lose cash.” As a result of in the event you lose an excessive amount of too early, it doesn’t matter what good funding lies forward, you merely received’t have the chips left to play.
Now take into consideration right this moment’s inventory market. Extra individuals are treating it like a on line casino than ever earlier than. Fuelled by zero-commission buying and selling choices, social media hype, FOMO, and straightforward cash narratives, investing has develop into much less about compounding wealth over time and extra about hitting jackpots. Many new traders aren’t even studying the rulebook. They’re rolling cube with leverage, momentum-chasing, options-trading, and buying and selling out and in of shares like they’re altering tables at a on line casino.
Now, to borrow some extent from my good buddy Anshul’s tweet, I received’t place the blame totally on them:
That is what makes the scenario much more fragile. For a lot of, as I agree with Anshul, derivatives or senseless buying and selling isn’t actually about earning money, not less than not sustainably. It’s seemingly a type of self-medication for uncertainty. A brief thrill. A shot of dopamine to flee deeper fears.
Nonetheless, the irony of all this (mis)behaviour is that the majority don’t realise the sport they’re in has no exit indicators. They’re strolling right into a psychological entice laid by the phantasm of management. And that’s exactly what Taleb warns us about: simply because the roulette wheel turned up pink ten instances doesn’t imply you’re due for black. The sequence issues. So does timing.
Two Books. One Function. A Higher Life.
“Uncover the extraordinary inside.”
—Manish Chokhani, Director, Enam Holdings
“This can be a masterpiece.”
—Morgan Housel, Writer, Psychology of Cash
Now, right here’s what it means to your portfolio:
Take into account two companies.
- Firm A has a clear stability sheet, generates constant free money flows, requires little exterior capital, and might afford to soak up shocks. It’s constructed to outlive dangerous instances. Even when the market turns in opposition to it, it’d lose quickly however it will possibly keep within the recreation.
- Firm B, alternatively, is financially fragile because it has excessive debt, skinny margins, and continually on the sting of survival. A single extended downturn can crush it. It doesn’t have the posh of a second probability.
So, what’s the distinction? Firm A could also be on the make, then lose path. It has one thing to lose, but in addition the capability to endure and get better. Firm B begins from the lose, and that’s usually the top of the story.
Now, path dependence is not only principle. It’s in every single place in markets.
- A startup that burns by means of capital with out a product-market match is path-dependent. If it fails early, no later pivot will matter.
- A leveraged dealer who blows up their account in a crash might by no means return to the market, even when their later concepts are sound.
- An investor who panics in a down market and sells their long-term compounding shares on the backside locks in a path that completely destroys wealth.
Once you make investments, consider path dependence not simply when it comes to enterprise well being, however in your personal means to remain within the recreation. Are you betting in a method that enables for errors and nonetheless leaves you standing? Or are you taking part in a recreation the place one incorrect transfer can knock you out?
Taleb’s deeper perception right here is brutal however trustworthy: Survival comes first. With out it, nothing else issues. Most speculators right this moment are blinded by recency bias and short-term dopamine. They don’t realise that actual investing success is path dependent.
So, ask your self truthfully: what are you holding in your portfolio right this moment? Are these “make, then perhaps lose a bit however survive” companies? Or are they “lose first, after which lose every little thing” bets dressed up as “scorching” alternatives?
Discard the latter. Follow the previous.
That is just because markets have a method of reminding us, usually harshly and with out warning, that sequence issues greater than we expect. Particularly whenever you’re risking your future on video games that solely seem like investing however function extra like Russian roulette.
