Why Risk Management is Really about Long-Term Survival
Age old wisdom: In investing and in life in general, avoiding fatal situations that kill us generally means that we can’t strive for the best possible returns. In other words, trying to follow the best strategies giving the highest returns can be seductive but generally also entails fatal risks – great on the short term but unsustainable on the long term!
Jared Diamond just published a new book, ‘The World Until Yesterday: What Can We Learn from Traditional Societies’, in which he describes in details those cultural traits of traditional societies that we should maybe consider re-introducing in our modern world.
Do you follow the age-old wisdom of having numerous small plots of value-creation?
In the field of risk management, he reminds us of age-old practices of hunter-gatherers and farmers, that evolved through time for their resilience. For example, traditional farmers generally farm a large number of different small plots (7 to 15 depending on the cultures) in different areas. This is clearly sub-optimal in terms of work, effort and yield. Yet it is the strategy that survived generations because it is the only strategy that ensures survival: diversity in location of the land plots means that even the worst years, some plots of land will give some returns and the farmer’s family will not starve. The current strategy of large fields and unique crops can only work in a developed system involving money where food can be bought in the case of a poor crop.
We are attracted by the stars that produce temporarily incredible returns on investment, that have incredible short-term success. We only forget that it always comes with substantial risks including bankruptcy or starving.
Success on the long term is about survival, and if possible comfortable survival; not great spikes of success followed by abysmal failures. Remember this the next time you’ll feel some hint of envy looking at some other young overnight success. It is defined by luck and in most instances, it is just the premise of a fatal evolution the other way.
Success is just about survival.
