Investing 101 : Playing the Infinite Game
Every sincere endeavour starts with a just cause. The stronger the cause, the more perilous, is its pursuit. Most human pursuits come to an end, or at least, are expected to end in an outcome. Our lives are full of such pursuits. Small, mundane weekly goals, to more long-term goals, all ending in a desired outcome or otherwise. Simply put, you either win or lose.
However, there are a few aspects of our lives, where the pursuit is endless. Here, our endeavour is not towards reaching an end-game that will produce the final outcome. On the contrary, our only goal is to prevent the game from ending. We are essentially playing an “Infinite Game” here.
Investors, unfortunately, neither Win nor Lose. They either stay the course or quit. The ones playing to win, mostly quit after sometime. The ones who try everything possible to stay in the game don’t win either; their bets just keep getting bigger.
Quite naturally, our approach to investing will depend on the path we would prefer to take. If our focus is to always get it right, we will attempt to predict the outcome and make choices that promise the fastest route to that favourable outcome. Forecasts are, but predictions only. They are an attempt to eliminate surprises, which points, inevitably, to the lack of preparedness in facing uncertainties.
Sadly, uncertainties never show up with a warning. Unfavourable events occur when they are least expected. Hence, while trying to play it “right”, one often ends up playing the “Sucker’s Game”, i.e, to get everything right and yet loose all our chips.
Not everything that happens, happens for a reason. But everything that survives, does survive for a reason. Hence, if we wish to stay in the game, we must focus on survival. If we look around ourselves; every edifice, every institution, every tradition and every corporation that has survived over generations, has done so for a reason.
Therefore, when it comes to investing, especially when it is pursued with a finite amount of wealth, dealing with stressors become critical. Our ability to deal with stressors determine how long we are able to stay in the game. The path to longevity is guided by two vectors;
- Redundancy : The element of slack, the buffers, that help you withstand shocks. Creating redundancy calls for “Prudence”. It is co-natural to Courage. The courage to fight our own impulses. Risk-taking is a function of “redundancy”. Greater your ability to deal with stressors, greater is your Risk-taking ability.
- Optionality : Investing is about making choices. However, attempting to make the “Right” choice may be troublesome. Instead, we just focus on loosing less when we are wrong and make significant gains when we are right. If we have “optionality”, we don’t have much need for what is commonly called intelligence, knowledge, skills, and all the complicated things that pervade the popular narrative. For we don’t have to be right that often. All we need is the wisdom to avoid doing things that hurt us and recognise favourable outcomes as and when they occur. The key here is that, the assessment doesn’t need to be made beforehand, but only after the outcome.
The two vectors discussed above aren’t correlated. But together they have a profound impact on our performance as investors. Grasping the interplay between the two vectors though, needs some practice.
Central to this approach of investing, is the premise that we are living in a very uncertain world, where prediction is almost impossible. Hence, choosing the alternative path as discussed above, may possibly be, the only way, to outperform the average in the long run.
Fri, 01 Jan 21.