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Game-Overs and Do-Overs

I imagine a bomb squad member on his knees, sweat trickling down his forehead, clutching two wires in his hands. There’s no room for do-overs in this profession, and he faces a potential game-over every time he shows up for work. For me, in investing, business, and life, it’s wise not to solely aim for the fastest route, the highest peak, or the biggest paycheck but to stay in the game. You’ll soon see why we need ample room for do-overs and none for a game-over. Allow me to explain.

Not far from where I grew up in Poland, there was a forest littered with explosives left by the Nazi army. As they retreated at the close of World War II, fleeing from the Soviet Army in the east into the arms of the Allies in the west, this dense forest with its rugged, uneven terrain was pockmarked with large craters from bombs – or so I was told.

World War II ended 35 years before I was born, but memories of it lingered as if it had concluded just a year prior. That particular site was shrouded in mystery. As children, we were regaled with stories of mishaps involving youngsters who dared to explore those woods. If you instruct children not to venture somewhere, especially if their more impulsive friends go, what do you think they will do? Aren’t investors sometimes similar?

Venturing into those woods carried the very real risk of an irreversible game-over, with no opportunity for a do-over.

What else should we be cautious of in life, business, and investing?

Friendships can crumble when trust is shattered. A promising career can be derailed by severe burnout. An investment portfolio might plummet due to a cluster of risky and volatile investments.

Recently, I had two extensive conversations with Luca Dellanna, author of the book Ergodicity, while recording a podcast episode. Guy Spier, a Zurich-based investor and author of The Education of a Value Investor, introduced me to Dellanna’s concepts. What instigated that discussion was another book, Finite, and Infinite Games, by James Carse. Carse explains that there are two types of games: finite games with winners or losers, time limits, and clear rules, and infinite games, where the goal is to sustain the game, akin to friendship.

Luca Dellanna posits that many games we engage in resemble a game of Russian roulette. One unfavorable outcome can remove us from the game, be it in a skiing competition or an investment career. “Irreversible consequences can absorb future gains,” – Luca writes. While not all situations are life-or-death, ignoring these “phantom consequences,” as Dellanna terms them, can lead to disastrous results.

Dellanna recounts a poignant tale of his cousin, a competitive skier whose career was abruptly halted before he turned twenty due to a leg injury. Dellanna explains, “It is not the best ones who succeed. It is the best ones of those who survive.”

What about do-overs? Dellanna uses the analogy of baking cakes. The allure of this activity lies in the low stakes and minimal risk. If a cake turns out poorly, you can simply start anew. In investing, maintaining a carefully chosen, well-researched, closely monitored, yet wisely diversified portfolio can be a recipe for harmless do-overs. If one stock falters, it’s an inconvenience, but it doesn’t wreak havoc, and you can readily replace it.

Almost everyone has heard tales of sudden, immense cryptocurrency fortunes, but fewer seem to share stories of financial ruin among former crypto “investors.” I, for one, have heard both. Financial do-overs are sometimes possible, but they are far from easy.

We manage money for families and individuals, the capital they don’t immediately need and can’t afford to lose. We operate under the assumption that once lost, the capital cannot be recovered. Often, we are responsible for a significant portion, if not the majority, of our clients’ liquid assets.

This role requires that we remain open to opportunities while being acutely risk-aware. Luca Dellanna’s book reiterates the importance of not taking certain risks. The greatest peril in life, business, and investing is concentrating on potential gains while neglecting the possible losses. We all yearn for a trophy, but first and foremost, we must ensure a safe journey.

I never set foot in that eerie, bomb-laden forest, and there are vast segments of the market you’ll never find me exploring. Let’s remain in the game, evade irreversible consequences, and allow ample space for do-overs.

Bogumil Baranowski

Published: 7/4/2023

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The information provided in this article represents the opinions of Sicart Associates, LLC (”Sicart”) and is expressed as of the date hereof and is subject to change. Sicart assumes no obligation to update or otherwise revise our opinions or this article. The observations and views expressed herein may be changed by Sicart at any time without notice.

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