risk
Survive first, then compound
The rule
You can only grow your money if you stay in the game. One wipe-out ends the whole story, however good your average looked before.
Where it flips
Too much caution can also ruin you. Cash eaten by rising prices for forty years also fails. Survival means dodging the risks that can kill you, not dodging all risk.
Taleb keeps the average apart from the path. A plan with a great average return, but a small chance of wiping you out, is a bad plan. Once you are wiped out, there is no next round for you. This is why R0 puts first things first. Emergency fund, insurance, and killing costly debt come before any market bet. These keep you in the game long enough for growth to work. Averages are only for people who survive.
A worked example
A trader makes +8% every month for a year. Then in the thirteenth month he uses borrowed money and loses 100%. His average month was a gain. But his account is now zero. [illustrative]
How to spot it
- ·no single event can take you to zero
- ·no borrowing that can force you to sell
- ·a cushion (emergency fund) between you and a forced sale
Nassim Nicholas Taleb · Skin in the Game; Fooled by Randomness