The Last Man Standing
Black Swan - Compounding - Unpredictability - Ruin - Robustness - Survival
Hello, I am Nicolas Bustamante. I’m an entrepreneur and I write about building successful startups.
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The world is driven by rare, unpredictable, and high-impact events often called Black Swans. They can be positive or negative, but they all shape our lives. Think about the September 11 attacks, the rise of the internet, the Fukushima nuclear disaster or, the 2020 lockdowns. Few events radically influence our life; a chance meeting, a disease, or a venture's success. Because they are so infrequent, most people choose to ignore their possibilities. On the contrary, I think that our life and risk management must be built around them.
Some may waste time trying to predict the future to anticipate those events. The future is, in essence, unpredictable. It's impossible to aggregate sufficient information to predict the future, especially in a world where one event can change the entire distribution. It's funny to note how the so-called experts are often wrong in their forecasts.
One's goal should be to avoid ruin or death in order to keep playing the game of life. Say you are is selling drugs, buying stocks on margin, or committing accounting frauds; your short-term positive returns will be above-the-average, but your long-term negative returns will be fatal. Ruin or death marks the end of the game; it's not possible to get back in. It's crucial never to break the exponential compounding effect of knowledge, capital, relationship, or, more broadly, life. It's not the size of the return that matters but how long you stay in the game. One should aspire to play long-term games with long-term people. As Einstein wrote: "Compound interest is the eighth wonder of the world. He who understands it earns it. He who doesn't pays it."
Negative Black Swans have practically an unlimited downside, so they lead directly to ruin or death. Because they are unpredictable and rare, it's also quite difficult to avoid them. The key is then to survive them by reducing your exposure to their negative consequences. For instance, it makes sense to avoid dangerous activities with high death rates or chronic behaviors that might have fatal consequences, such as consuming drugs or smoking. From a financial perspective, it makes sense to diversify into safe assets stored in stable countries. It reduces one short-term return only to increase the long-term returns. Whatever happens, you don’t care because you are safe and robust. This strategy may even offer the possibility to benefit from positive high-impact events.
Positive Black Swans are interesting because they have an unlimited upside. The key is thus to maximize the exposition to such events. One might want to work in positive black-swan-prone domains, such as artistic creation, entrepreneurship, scientific research, where the downsize is small, and the upside is gigantic. There are also black-swan favorable cities given one's activity: Los Angeles for the entertainment, San Francisco for the technology, Paris for the art. It's vital to stay agile by preserving the ability to learn new skills, explore new domains, deploy capital, change geography, to seize this kind of opportunity. Note that it's only possible if you first survive adverse fat-tailed events.
I'm often labeled as paranoid due to my fear of high-impact events. Coming from a family who suffered ruin after fleeing their home country because of war doesn't help. More broadly, living in Europe has made me suspicious of the supposedly calm and monotonous situation. The history of Europe is full of moments of peace followed by surprising and brutal eruptions of violence. To grasp this paradox, I encourage you to read Stefan Zweig's masterpiece, The World of Yesterday. For most Europeans, memories of violence and liberticide conditions are recent past. The Berlin Wall fell only 31 years ago, and dictatorship ended only 45 years ago in Spain and Greece. Today’s life seems stable until you experience double-digit monthly inflation like in Turkey or the collapse of Cyprus's banking system.
I'm a strong optimist. I don't fear the future, and I'm no sympathizer to collapsology. Contrary to most, I don't spend time predicting the future. I focus on building robustness. I want to limit the downside consequences of extremely impactful events. Most reassure themselves by saying "it's almost impossible" or "it won't happen again". I comfort myself by saying, "I don't know, and I don't care because I'm protected." Anything can happen as long as I have tail-protection. As Taleb writes: "When paranoid, you can be wrong 1000 times & you will survive. If non-paranoid; wrong once, and you, your genes, & the rest of your group are done." Better to be the last man standing!
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