Path Dependence: A Lesson for New Buyers

I used to be going by way of just a few of my journal notes and got here throughout this thought from Nassim Taleb who defined the idea of “path dependence,” which is the dependence of outcomes on the trail of earlier outcomes, somewhat than merely on present situations –

Ironing your shirts then placing them within the washer produces a unique end result 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. Now, assume that your capital is round a million {dollars} and you’re concerned in hypothesis. Apply path dependence to the reasoning.Making 1,000,000 {dollars} first, then dropping it, is markedly totally different from dropping 1,000,000 {dollars} first then making it.

The primary path (make-lose) leaves you intact; the second (lose) makes you bankrupt, bancrupt, maimed, traumatized and extra typically unable to remain within the sport, thus unable to learn from the second a part of the sequence. There isn’t any make after the lose.

This word from Taleb jogged my memory of Warren Buffett’s “Rule No. 1 – By no means LOSE cash.”

Think about a weak, fragile enterprise. It’s path-dependent. With stretched stability sheet, giant capital requirement, and insufficient capability to endure, a chronic weak point within the economic system can destroy it. It’s then troublesome for it to rise from that wreck. Once you personal such a enterprise, it’s important to do plenty of praying to the economics gods. Such a enterprise begins from a “lose” and now it’s troublesome, nearly unimaginable, for it to “make” again what it misplaced.

Alternatively, a strong and anti-fragile enterprise, with clear stability sheet and low capital requirement, which has constructed a capability to endure over years, just isn’t path dependent. It will probably survive a weak economic system. Even when the weak point persists, at worst, it could lose what it has already made, which is best than beginning with dropping all of it.

So, take a look at what you already personal in your portfolio. Is it within the “make, then lose” class, or “lose, then lose every little thing” one?

Keep on with the previous. Discard the latter.

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I’ve began work on a sequence of brief movies to share my ideas round investing, determination making, studying, and simply the follow of making an attempt to reside a great life. Have printed the next 4 movies to this point, which you’ll be able to watch on my YouTube channel –

This initiative has a twin goal. One, to share my key classes across the above-mentioned concepts with you in byte-size format, and two, to assist me recover from my nervousness and shyness to talk in entrance of a digicam (and you may see from these movies how dangerous I’m at these!). I hope, over time, I’m able to ship on each of those fronts. 🙂

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As dad and mom, we regularly ask, then ask once more, and ask once more our youngsters to do one thing we want they do. And if we’re fortunate, our youngsters cooperate after the fourth or fifth request or after a loud however in any other case innocent scolding.

We complain that our youngsters by no means hearken to us and ask different dad and mom how they get their children to behave, eat wholesome meals, and fall asleep on time. If that’s not all, we seek the advice of the Web and several other books on citing well-cultured and disciplined kids. Then, whilst we apply all these strategies, our youngsters simply don’t hear.

However, amidst all this, there’s one thing we regularly miss out on with our youngsters. Even when they don’t seem to be listening to us, they’re busy observing us.

I’ve usually seen this with my children. They might usually not hearken to what I’ve to inform them. However they’d at all times be observing my actions. And that retains me on my toes, just because my children are ‘watching’ me.

I discovered this thought reiterated on this fantastic e book I’m studying for, possibly, the fifth time – Peter Bevelin’s All I Wish to Know is The place I’m Going to Die So I’ll By no means Go There. Right here is an excerpt from that e book the place Warren Buffett and Charlie Munger, in dialog with a seeker of knowledge, share with him the most effective technique of coaching kids…

In case you haven’t picked up this e book, I recommend you do. It is going to be the most effective investments in searching for knowledge you’ll ever make.

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Ryan Vacation writes about how Roman emperor Marcus Aurelius conquered stress, and the remainder of us can too –

By taking the time to journal and write, he was chipping away at his nervousness, simply as all of us can – within the morning, at evening, on our lunch break. At any time when.

To calm his nervousness, Marcus was additionally always making an attempt to get perspective. Generally he zoomed approach out. He meditated on his insignificance. “The infinity of previous and future gapes earlier than us,” he wrote, “a chasm whose depths we can’t see. So it could take an fool to really feel self-importance or misery.”

Different occasions, he zoomed approach in, telling himself to take issues step-by-step, second by second. Nobody can cease you from that, he mentioned. Focus like a Roman, he mentioned, on what’s in entrance of you prefer it’s the very last thing you’re doing in your life.

Don’t fear about what’s occurred up to now or what would possibly occur sooner or later.

This concept of being current is essential to overcoming our stress.

We are sometimes anxious due to what we worry will occur subsequent, or after what occurs subsequent. We fear about worst case situations. We dread potential obstacles. However Marcus, from Epictetus, knew that “Man just isn’t apprehensive by actual issues a lot as by his imagined anxieties about actual issues.”

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That’s about it from me for at present.

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With respect,
— Vishal