Never play the Russian roulette

Charlie Munger often says, “tell me where I’m going to die, so I will never go there”. Avoidance of terminal risk is of great importance to him (and to Warren Buffett).

That is a very important thing to follow in life.

A Russian roulette is one game that is simply not worth playing at any price, even though the odds are in your favor. (There is a 5/6th chance that you will survive and there is a 1/6th chance that you’ll get the bullet, if the chamber is reset every time.)

Source: Wikipedia
Image Source / credit: Wikipedia

Any game that can get you killed is just not worth it! Even if there is a good chance that you might survive and win a hefty prize.

Yet, in real life, sensible people play the Russian roulette in different forms and get stung badly in life. In many cases, the result is total ruin – to the extent of screwing up lives of people involved. In my initial days, I’ve done a few things that could have gone wrong too. Luckily, they didn’t.

Few examples I’ve seen are:

  1. taking a loan beyond capacity to fund a risky business
  2. investing large % of money in speculative real estate with questionable papers
  3. trading in stocks with margin money
  4. give a large loan guarantee to a guy who didn’t deserve it in first place
  5. putting all eggs into one risky basket

Now, the real point in the above list is NOT risk itself, but risk beyond capacity. You can invest 10% of your money in a very risky venture that goes kaput and still stand your ground. That is fine – but you cannot do that with 75% of your money and still expect things to be normal.

My own business is a high risk venture – we rent out high value items without taking any collateral. In a bad year, we could potentially lose a lot. Keeping that in mind, our growth and investments are limited by the maximum risk we can handle. Risk capacity management takes #1 priority, not growth.

This attitude has helped me at times of stress like the fraud we had in 2012 or the stock market crash of 2008 or the dull market in 2013.

If the collective risk is too high for me to handle, no matter how lucrative the idea is, we won’t do it. I hope I never forget this important rule in life – ever!

Russian roulette’s are not worth playing in life! That is, if you value your life :).

Leave a Reply

Your email address will not be published. Required fields are marked *