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 e-book your seat.
Seats are restricted in every metropolis. The primary 20 members can declare an early chook low cost.
Whereas flipping by means of a number 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 aren’t only a perform 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 special 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 following Sunday afternoon.
He then utilized that very same thought to cash:
Assume that your capital is round a million {dollars} and you might be concerned in hypothesis. Making 1,000,000 {dollars} first, then shedding it, is markedly totally different from shedding 1,000,000 {dollars} first, then making it.
Within the first path (make, then lose), you’re at the least alive to battle one other day. You could find yourself with much less, however you’ve tasted survival. Within the second path (lose, then make), you might by no means even get to the “make” half. As a result of shedding early can go away you bankrupt, damaged, demoralized, and most significantly, unable to remain within the sport.
And if you happen to’re out of the sport, the remainder of the trail 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 if you happen to 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 at present’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 simple cash narratives, investing has turn 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 fully on them:
That is what makes the state of affairs much more fragile. For a lot of, as I agree with Anshul, derivatives or senseless buying and selling isn’t actually about earning profits, at the least not sustainably. It’s seemingly a type of self-medication for uncertainty. A short lived thrill. A shot of dopamine to flee deeper fears.
Nonetheless, the irony of all this (mis)behaviour is that almost all 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 occasions doesn’t imply you’re due for black. The sequence issues. So does timing.
Two Books. One Goal. A Higher Life.
“Uncover the extraordinary inside.”
—Manish Chokhani, Director, Enam Holdings
“It is a masterpiece.”
—Morgan Housel, Creator, Psychology of Cash
Now, right here’s what it means to your portfolio:
Contemplate 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 occasions. Even when the market turns towards it, it would lose quickly however it may well keep within the sport.
- Firm B, however, 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 luxurious 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 undergo and recuperate. Firm B begins from the lose, and that’s usually the top of the story.
Now, path dependence isn’t just concept. 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 by way of enterprise well being, however in your personal capability to remain within the sport. Are you betting in a method that enables for errors and nonetheless leaves you standing? Or are you taking part in a sport the place one mistaken transfer can knock you out?
Taleb’s deeper perception right here is brutal however sincere: Survival comes first. With out it, nothing else issues. Most speculators at present are blinded by recency bias and short-term dopamine. They don’t realise that actual investing success is path dependent.
So, ask your self actually: what are you holding in your portfolio at present? Are these “make, then perhaps lose a bit however survive” companies? Or are they “lose first, after which lose every thing” bets dressed up as “scorching” alternatives?
Discard the latter. Keep on with 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.
