Path Addiction: Lessons for New Investors

Sketchbook of Wisdom: A Handcrafted Manual on the Pursuit of Wealth and the Good Life

Buy your book, which Morgan Housel calls “a masterpiece.” It features 50 timeless ideas—from Lord Krishna to Charlie Munger, Socrates to Warren Buffett, and Steve Jobs to Naval Ravikant—as they apply to our lives today. Click here to buy now.

I was going through some journal notes and came across this idea from Nassim Taleb, who explained the concept of “path dependence”, which is the dependence of outcomes on the path of previous outcomes, rather than simply on current conditions –

Ironing the shirts and putting them in the washing machine produces a different result than washing the shirts first and then ironing them. The reader can either believe me or try an experiment with both sequences next Sunday afternoon. Now let’s assume that your capital is around one million dollars and that you are engaged in speculation. Apply path dependency to reasoning.First making a million dollars and then losing it is vastly different from first losing a million dollars and then making it.

The first path (make-lose) leaves you intact; the second (loss) leaves you bankrupt, insolvent, crippled, traumatized, and generally unable to stay in the game, so you can’t benefit from the second part of the sequence. There is none here make after lose.

This comment from Taleb reminded me of Warren Buffett’s “Rule #1 – Never LOSE Money”.

Consider a weak, fragile business. It depends on the path. With a stretched balance sheet, large capital requirements and a lack of resilience, prolonged economic weakness can destroy it. It is difficult to rise from that ruin. When you own a business like this, you have to pray a lot to the economics gods. Such a trade begins with a “loss” and now it is difficult, almost impossible, for him to “earn” back what he lost.

On the other hand, a robust and non-fragile business with a clean balance sheet and low capital requirements that has built up the ability to lean over the years is not path dependent. It can survive a weak economy. Even if the weakness persists, at worst he can lose what he’s already done, which is better than losing everything to begin with.

So take a look at what you already own in your portfolio. Is it in the “make then lose” or “lose then lose everything” category?

Stick with the ex. Dispose of the latter.

* * *

I started working on a series of short videos to share my thoughts on investing, decision making, learning and just the practice of living a good life. So far we have published the following four videos for you to watch my YouTube channel

This initiative has a dual purpose. Firstly, to share with you my key lessons regarding the above ideas in a byte-sized format, and secondly, to help me overcome my anxiety and shyness of speaking in front of the camera (and from these videos you can see how bad I am at !). I hope that in time I will be able to fulfill both of these fronts. 🙂

* * *

As parents, we often ask, then ask again, and ask our children to do something we wish them to do. And if we’re lucky, our children cooperate after the fourth or fifth request or after a loud but otherwise innocuous reprimand.

We complain that our children never listen to us and ask other parents how they get their children to behave, eat healthy food and go to bed on time. If that’s not all, we consult the Internet and several books on raising well-behaved and disciplined children. Then, even though we apply all these techniques, our kids just don’t listen.

But amidst all this, there is something we often don’t notice about our children. Even if they are not listening to us, they are busy watching us.

I have often noticed this with my children. Often they would not listen to what I have to tell them. But they would always watch my actions. And that keeps me on my toes, simply because my kids are ‘watching’ me.

I found this idea echoed in this wonderful book that I’m reading for maybe the fifth time – Peter Bevelin All I want to know is where I’m going to die, so I’ll never go there. Here is an excerpt from the book where Warren Buffett and Charlie Munger share with him the best method of training children in an interview with the seeker of wisdom…

If you haven’t picked up this book, I suggest you do. It will be one of the best investments in your search for wisdom that you will ever make.

* * *

Ryan Holiday writes about how Roman Emperor Marcus Aurelius defeated stressand the rest of us can too –

By making time to journal and write, he was relieving his anxiety, just like we all are – morning, night, lunch break. Whenever.

To calm his anxiety, Marcus also constantly tried to gain perspective. Sometimes he moved away. He meditated on his insignificance. “The infinity of past and future stares before us,” he wrote, “an abyss whose depth we cannot see. So it would take an idiot to feel self-importance or anxiety.’

Other times he approached and told himself to take things one step at a time, moment by moment. No one can stop you, he said. Concentrate like a Roman, he said, on what is before you as if it were the last thing you do in your life.

Don’t worry about what happened in the past or what may happen in the future.

This idea of ​​presence is the key to overcoming our stress.

We are often anxious about what we fear will happen next or after what will happen next. We fear worst case scenarios. We fear potential obstacles. But Marcus of Epictetus knew that “a man is troubled not so much by real problems as by his imagined anxieties about real problems.”

* * *

That’s about all from me for today.

If you liked this post, please share it with others at WhatsApp, Twitteror email them with a link to this post.

— Vishal

Leave a Comment