Losing Many Times To Get Rich In The Long Run
A simple parable will change the way you understand finance
I have always liked children’s stories with a moral. When we are young, we only see them as a bedtime story, but as time goes by, you begin to connect the dots and understand all the background they have in many aspects of life.
The one I want to talk about today is the story of ‘The Tortoise and the Hare’ and how it resembles the inversion. On the one hand, we have the tortoise who walks steadily, his pace is slow, but he never stops, under any circumstances. On the other hand, we have the hare who is able to go much faster than the tortoise and could reach the finish line much sooner. However, the hare often stops or returns to the starting point.
‘The slower but consistent tortoise causes less waste and is more desirable than the speedy hare that races ahead and then stops occasionally to doze. The Toyota Production System can be realized only when the workers become tortoises’ — Taiichi Ohno (designer of Toyota’s Just In Time production system)
In addition, there are many other factors that could be taken into account in this story and that, although it may not seem so, could be of infinite help to us. One of the factors that is not explained to children is why the turtle really goes so slowly and it is because it has a shell on top of it. This shell protects him from any possible landslide or mishap that might occur along the way. However, the hare would have nowhere to hide. Not to mention what would happen if the race between the two occurred in extreme situations, for example, torrential rains that triggered flooding. In this case, the tortoise could swim, while the hare would drown.
I find this last example very interesting, and the fact that while tortoises can only walk at 1mph, they are able to swim at 12mph, it benefits from the disorder, from the asymmetries. I don’t know if you see what I’m getting at?
Last, but not least, the comparison I want to make between the two animals is life expectancy. The hare has a life expectancy of only 5 years. Whereas tortoises, you know, can live +100 years.
This story replicates our investment style, we live quietly, we save from our work and we have a totally asymmetric strategy. We live protected from any event, knowing that our life expectancy can be longer. We know that the day a storm comes, we don’t know when, we’ll be afloat and we’ll even go much faster, while the hares won’t be able to survive. Not only that, but you can also get totally exorbitant returns, we have the example of Spitznagel.
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We also have to be aware that we will meet many hares along the way. People with leveraged concentrated portfolios and investing in high-risk assets, who will tell you that they are halfway through the marathon when you are only 1 mile into it. We have to avoid listening to siren songs and think about how many people have become rich with this type of asset, I doubt that more than 0.001%, while the rest have fallen by the wayside. To all those who talk to you about infinite returns in a small period of time, ask them to explain it to you, and when they do not know how to do it, remember:
‘If you can’t explain it to a 6-year-old, it means you don’t know it.’— Albert Einstein.
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This article is for informational purposes only, it should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any major financial decisions.