Outperforming The S&P 500 Index & The Dangers Of Long-Term Compounding | Guy Spier

Summary

The speaker reflects on the importance of record-keeping in investment decisions, likening it to maintaining a personal diary for accountability. He discusses the benefits of having a structured pre-trade check and the impact of regulatory constraints on decision-making. The conversation delves into the power of long-term compounding, using the Aquamarine Fund as an example, which has significantly outperformed market indices over 26 years. Despite the impressive returns, the speaker expresses a sense of disappointment for not achieving his initial high-return goals, highlighting the bittersweet nature of compounding and the need for a balanced approach to investing that prioritizes survival and resilience over extreme risk-taking.

Takeaways

• 📋 The importance of maintaining a record of investment decisions is emphasized, akin to keeping a personal diary for accountability and reflection.
• 🔍 Pre-trade checks are crucial for ensuring mindful decision-making and can be documented using modern tools like transcription software to create an official journal.
• 🤔 The speaker recounts a specific instance where a CFO's request for more information led to a change in investment strategy, highlighting the value of second opinions and deeper analysis.
• 💡 The concept of constraints is discussed as a positive force, where regulatory and other limitations can lead to better decision-making and creativity, much like an artist working within a set form.
• 🏢 The speaker discusses the shift from a distributed office to a centralized one due to regulatory constraints, noting the benefits of in-person, regular communication for evolving systems and strategies.
• 🌐 The skepticism towards distributed teams is expressed, suggesting that being in one place allows for better adaptation to changing circumstances and a more cohesive team dynamic.
• 📉 The Aquamarine Fund's long-term performance is highlighted, showing the power of compounding returns over 26 years, but also the bittersweet reality of not achieving the initially expected higher returns.
• 🎯 The focus on avoiding catastrophe and ensuring long-term financial security is underscored as more important than achieving the highest possible returns.
• 🛑 The value of a cautious approach to investing is illustrated with the story of a ski racer who prioritizes not getting injured over winning individual races, aligning with the long-term compounding strategy.
• 🚫 The dangers of high-risk, high-reward strategies are discussed, with the speaker sharing personal experiences and the importance of ensuring the portfolio can withstand various market conditions.
• 🤝 The influence of mentors and successful investors like Warren Buffett is noted, particularly their focus on downside risk and the resilience of their investment strategies.

Q & A

What is the basic principle of regulatory compliance in decision-making?

The basic principle of regulatory compliance is to maintain a record of the reasons behind decisions made, which serves as an official journal of actions taken and the rationale behind them.

How does keeping a record of investment decisions benefit investors?

Keeping a record acts as a check for mindless decisions, provides transparency, allows for accountability, and enables other staff to monitor the investment strategy for any unusual activities.

What is the significance of having a pre-trade check before making an investment?

A pre-trade check ensures that the investor has a documented reason for the trade, which can be reviewed and edited if necessary, creating a written record that justifies the decision.

How does the speaker's experience with regulatory constraints affect their perspective on distributed teams?

The speaker has become skeptical of distributed teams due to the challenges in developing coherent responses to regulatory constraints across different time zones and geographies, believing that being in one office facilitates better communication and adaptation.

What is the speaker's view on the importance of long-term compounding in investment?

The speaker views long-term compounding as crucial, emphasizing that the goal is financial security and independence rather than beating the market. They highlight the importance of avoiding catastrophe and staying in the game.

How does the speaker describe the experience of managing the Aquamarine Fund over 26 years?

The experience is described as bittersweet, with the fund outperforming the market but not achieving the high returns initially expected. The speaker reflects on the power of compounding and the importance of a稳健 (steady/cautious) approach to investment.

What is the analogy used to explain the importance of not focusing solely on winning individual investment 'races'?

The analogy of skiing is used, where the goal is to finish the season without injury, not to win each individual race. This emphasizes the importance of long-term success over short-term gains.

How does the speaker relate the concept of constraints to creativity and decision-making?

The speaker relates constraints to creativity by suggesting that having certain rules and limitations can force one to become the best version of themselves, similar to how artists work within the constraints of a particular form to create something beautiful.

What role does the speaker's father play in the establishment of the Aquamarine Fund?

The speaker's father was one of the initial investors in the Aquamarine Fund, contributing a significant portion of his liquid net worth, which provided the foundation for the fund's growth.

How does the speaker reflect on the impact of regulatory constraints on their investment strategy?

The speaker initially found regulatory constraints challenging but later realized that they provide opportunities for outperformance by forcing a rational and structured response to uncertainty.

What lesson does the speaker learn from their experience with a bankruptcy in their portfolio?

The speaker learns the importance of not taking excessive risks, even with a small part of the portfolio, and the value of making decisions that ensure survival and stability across all possible outcomes.

Outlines

00:00

📋 The Importance of Documentation in Investment Decisions

The speaker emphasizes the necessity of maintaining a record for every investment decision made, likening it to keeping a personal diary. This practice not only provides a rationale for actions taken but also serves as a check against impulsive decisions. The speaker shares a personal anecdote about altering a trade due to a CFO's request, highlighting the value of second opinions and the mental and governance benefits of having a documented investment process. The discussion also touches on the psychological aspects of decision-making and the importance of not becoming agitated when challenged, but rather viewing it as an opportunity for reflection and improvement.

05:01

🏗️ Adapting to Regulatory Changes and the Value of Centralization

The speaker discusses the impact of regulatory constraints on their investment strategies, suggesting that these constraints can paradoxically lead to opportunities for outperformance. They argue that being in one office facilitates better communication and adaptation to new systems compared to a distributed team. The speaker also shares their skepticism towards the effectiveness of distributed teams, especially across different time zones and geographies, and the importance of being in one place to allow for structural evolution in response to changing circumstances.

10:05

🎢 The Bittersweet Reality of Long-Term Compounding

The speaker reflects on the long-term performance of their Aquamarine Fund, which has averaged nearly 9% annual returns over 26 years, significantly outperforming the S&P and MSCI. Despite this success, there is a sense of disappointment as the speaker initially aimed for higher returns. They discuss the concept of compounding and the realization that consistency and avoiding catastrophe are more important than high annualized returns. The speaker also touches on the unpredictability of success and the importance of making decisions that ensure a good outcome regardless of market conditions.

15:06

🛡️ Prioritizing Survival and Financial Security in Investing

The speaker delves deeper into the philosophy of investing for survival and financial security rather than chasing high returns. They discuss the importance of ensuring that investment strategies work out 'at least okay' in all possible scenarios, rather than aiming for spectacular results that could lead to ruin in certain circumstances. The speaker also shares a personal experience of bankruptcy due to a risky investment, underscoring the need for caution and the value of learning from mistakes.

20:07

🏂 The Skiing Analogy: Balancing Risk and Reward in Investing

Using a skiing analogy from Luca Delana's book, the speaker illustrates the concept of balancing risk and reward in investing. They compare the strategy of skiing as fast as possible to win individual races (akin to chasing high investment returns) with the strategy of skiing at a speed that minimizes the risk of injury to ensure completion of the season (akin to ensuring long-term financial security). The speaker emphasizes the importance of long-term compounding without catastrophe and the wisdom of prioritizing survival and resilience in investment strategies.

25:08

🗝️ Lessons from Warren Buffett: Resilience and Bold Bets

The speaker recounts insights from Warren Buffett's investment strategies, highlighting his focus on resilience and the ability to make bold, well-informed bets. They discuss Buffett's decision to issue equity in White Mountains Insurance to ensure the company's survival, reflecting a cautious approach to risk. The speaker contrasts this with their own past decision-making and expresses a desire to have taken smaller, more frequent bets in the early stages of their career, suggesting a balance between caution and boldness in investment strategy.

Keywords

💡Regulatory Principle

The regulatory principle mentioned in the script refers to the need for a formal record of decision-making processes, particularly in financial contexts. It is akin to maintaining a personal diary but serves as an official journal for tracking the rationale behind significant decisions. In the video's theme, it is crucial for ensuring transparency and accountability in investment choices. An example from the script is the requirement to record pre-trade checks to justify the decisions made for buying or selling positions in a portfolio.

💡Long-term Compounding

Long-term compounding is a central concept in the script that highlights the power of consistent growth over an extended period. It is a financial principle where earnings are reinvested to generate returns on returns, leading to exponential growth. The video discusses how this concept has been applied in managing the Aquamarine Fund, which has averaged almost 9% annual growth over 26 years, illustrating the significance of sustained compounding in wealth accumulation.

💡Portfolio Management

Portfolio management is the process of making investment decisions regarding the selection of various assets in a portfolio. In the script, it is exemplified by the speaker's approach to buying and selling positions, adjusting their strategy based on the CFO's feedback, and the importance of having a written record of these decisions. The concept is integral to the video's theme, as it showcases the dynamic nature of investment decision-making.

💡Risk Management

Risk management is the practice of identifying, assessing, and prioritizing potential risks to minimize or avoid them. In the context of the video, it is discussed in relation to the Aquamarine Fund's performance and the importance of avoiding catastrophic losses to ensure long-term compounding. The script mentions the bankruptcy incident as an example of poor risk management and contrasts it with the prudent approach of issuing equity to safeguard against adverse outcomes.

💡Survival Bias

Survival bias is the tendency to focus on surviving entities or events while overlooking those that have failed. The script touches on this concept when discussing the importance of not only achieving high returns but also ensuring survival and stability in investment portfolios. It serves as a reminder that success in investing is not solely about high returns but also about enduring through various market conditions.

💡Diversification

Diversification is a risk management strategy that involves spreading investments across various financial instruments, industries, or other categories to minimize the impact of any single investment's poor performance. The script implies the importance of diversification through the discussion of maintaining a balanced portfolio and the potential risks of concentrating investments in a single stock or highly valued assets.

💡Mental Energy

Mental energy, as mentioned in the script, refers to the cognitive resources and effort invested in making decisions and managing tasks. In the context of portfolio management, it highlights the mental effort required to monitor positions and the decision to divest from smaller positions to conserve this mental energy for more critical investment decisions.

💡

💡Governance

Governance in the script pertains to the structures and processes that ensure an organization is run responsibly and ethically. It is tied to the video's theme by emphasizing the importance of multiple oversights on investment decisions, ensuring that actions are transparent, accountable, and aligned with the organization's goals and regulations.

💡Constraints

Constraints are limitations or restrictions that can affect decision-making and actions. The script discusses how constraints, such as regulatory requirements or self-imposed rules, can paradoxically lead to better outcomes by forcing individuals to think more critically and creatively. An example is the regulatory principle that mandates recording investment decisions, which can lead to more thoughtful and justified actions.

💡Ego and Investing

Ego and investing are interconnected concepts in the script, where the speaker reflects on the emotional aspect of investing, particularly the disappointment of not achieving the high returns initially expected. It serves as a cautionary tale about the dangers of letting ego drive investment decisions and the importance of focusing on long-term stability and compounding rather than short-term ego gratification.

💡Resilience

Resilience is the ability to recover quickly from difficulties or adapt to change. In the script, it is highlighted through the analogy of a skier who prioritizes not getting injured over winning individual races, which parallels the investment strategy of prioritizing long-term survival and stability over short-term gains. The concept is integral to the video's theme of long-term compounding without catastrophe.

💡Downside Protection

Downside protection is a strategy aimed at minimizing potential losses in an investment. The script references this concept through the discussion of Warren Buffett's approach to investing, where he spends considerable time considering the worst-case scenarios to ensure that his investments can withstand extreme events. This underscores the importance of protecting the downside in pursuit of long-term investment success.

Highlights

The importance of keeping a record for regulatory and personal accountability in investment decisions.

Use of technology like 'utter' for transcribing pre-trade checks to create an official journal of investment decisions.

The concept of a 'pre-trade check' as a method to prevent mindless decisions in portfolio management.

The CFO's role in requesting more information to justify investment decisions, promoting a culture of accountability.

The mental and monitoring costs associated with maintaining smaller investment positions.

The value of self-reflection and recognizing one's emotional responses to decision-making.

The benefits of constraints in fostering creativity and excellence, drawing parallels to literature and poetry.

The impact of regulatory constraints on the necessity for a centralized office environment for effective communication.

The preference for a centralized team over a distributed team for evolving structures and adapting to changing circumstances.

The power of long-term compounding illustrated by the Aquamarine Fund's 26-year performance.

The bittersweet nature of achieving a lower-than-expected average annual return and its impact on the investor's ego.

The philosophy of investing for survival and stability over chasing high returns and potential catastrophe.

The analogy of skiing to illustrate the balance between risk-taking and longevity in investing.

The importance of compounding without catastrophe as a long-term investment strategy.

The challenge of distinguishing between skill and luck in investment performance over time.

The decision-making process and its impact on investment outcomes, regardless of the actual results.

The story of a fund manager who lost everything by investing in a single stock, emphasizing the perils of concentrated bets.

The influence of Warren Buffett's cautious approach to downside risk and its application in investment strategy.

Transcripts

the the basic principle regulatory

principle is we want a record of why you

made these decisions and it's a very

it's almost like I think that the

benefit of doing that is that it's like

you know many investors talk about

keeping a diary a personal diary or a

personal journal and this is kind of

like an official Journal if you like of

what happened and why did you do it and

we see that this move was made in the

portfolio made this decision is there

any kind of like backup for this so in

my case I I wrote my pre-trade check for

actually we we've modified it I don't

have to write it I just have to record

it and then and then we can use uh you

know um utter or similar to transcribe

it gets edited lightly and we have a

written record and there's a mark on a

piece of paper that shows that so i'

done the pre-trade check for the thing

that I wanted to buy and uh I kind of

said look we we're going to make this

like 3 or 4% position and we're going to

sell these things to do it these smaller

positions and uh the CFO came back to me

and he said look the buy side is fine

but we need a little bit more so then I

said okay fine I'll write it up and I I

looked more closely at these smaller

positions and I said wait a second I

don't I don't want to sell this this

cheap it's like there's no I'm so we

went back and instead of buying a 4%

position we bought I believe a 2%

position and and the balance is still to

be bought so yes it acts as a kind of a

check for Mindless decisions if you like

now there is an argument for saying that

if it's such a small proportion of the

portfolio just clear it out but at least

then I would have to make that case yes

they're cheap but there is a there is a

cost to us to monitoring these positions

and there's a mental energy that we're

in we're investing that we no longer

want to invest in them uh but he stopped

me and I believe that that was the right

thing to do at that or in a sense he

wasn't stopping me he was saying that's

fine but I need to know why you so uh

and of course

uh it's it's delicate because because

somebody could say damn it I just want

to do it or isn't it obvious why and on

the other side um you know if somebody I

mean William and I I think I've figured

out mainly through therapy sessions with

lri my wife that if you're getting

agitated then the first thing we do and

we get agitated is we want to think it's

somebody else doing something to us and

they probably are doing something to us

but that's not the point the point is

what we're doing to ourselves and so if

I would have gotten agitated that

response that in itself would have been

something to pay attention to I didn't

get agitate I was like yeah he's got a

good point and oh my God check that out

no I don't want to do that right now so

he's just saying give me your reasons

and make sure the reasons are on paper

it also for what it's worth from a

governance standpoint means that there

are there are multiple eyes on these

pre-trade checks or this investment

official investment Journal that also

allows for example other staff in the

office to say yeah this is going the way

it to be going or my gosh there's

something really weird going on here I

need to put some phone calls into our

directors to say this you know he's he's

lost his marble so to speak so um it's

it's a new world for me I've been

learning to live in that world and it's

been interesting for me to to learn what

I needed to become uh but also the

people around me have come to trust me

it took about it's it's it's a slow

process and there's a beautiful line

that I often quote it sounds really

pretentious I often quoted it to my kids

Henry and mine from um n where he talked

about how the the genius dances within

chains and

it's I always talked about it in in

terms of of literature that it's kind of

helpful to have certain rules and

constraints whether it's a a poet with

certain types of of meter or whatever

you think of Shakespeare having to write

with I Amic pentus where it's like d dum

dum dum dum dum and yet somehow you can

write amazing things within that rhyme

scheme and there's something about being

regulated by the Swiss that it it's

chains right I mean and yet somehow you

can make it work for you by saying well

actually it's kind of helpful to have a

circuit breaker that forces me in

writing or in a dictation to explain why

I would sell this position yeah I mean

there's there's so I I'm not I don't

consider myself a creative guy but it's

it seems to me the case that uh actually

finally enough William with CCE that you

introduced me to every time I have so

much fun doing these holiday cards CCE

is a wonderful art director who who was

a great art director at the time who I

worked with for years and has been doing

lots of design stuff for guy including

the cover of the educational value

invest yeah exactly and sorry for for

not explaining and uh with the holiday

cards every time what makes the holiday

card and I have so much fun with her is

that we have some power ful constraint

so uh that that prevents us from doing

what we'd originally thought and then

it's in the work of going around that

constraint that uh a really really fun

card comes out so this idea of and I am

big pentameter how strange that actually

having those constraints forces you to

become um the best version of yourself

perhaps and yeah so that I guess that's

true uh of the regulatory work what I

wanted to say is that you know there

look what is it it's one a few times

many times this last few days William

You' used the the phrase It's one damned

relatedness after another and the world

is complicated so uh I used to love sort

of like the distributed office so you

know uh we uh we we had a member of our

staff in New York we had a member of our

staff in the BVI but but in responding

to the new constraints for example from

uh regulatory constraints working out

new systems uh far better to be in one

office because you want to have intense

and regular conversations about how to

make it work and if you're in a

different time zone and you're doing it

over the phone you kind of don't have

enough opportunity to figure out that

system and so um uh I think that um the

the regulatory constraints those

constraints provide the opportunity for

outperformance or excelling in a certain

way once You' kind of grasped them

you've engaged with them and you're

developing a rational response to them

at the same time I feel like in the past

developing that response was made more

difficult by the fact that we didn't

have a full office day with all of the

staff who were and what I came to it's

just coming to something very practical

which was that that needs to be worked

out in one office not not in a

distributed team and I've become very

leery eyed of people who say that they

can work effec ly in a distributed team

across uh sort of multiple time zones

and and large geographies I think

there's an enormous benefit to being in

one place and when you're all in one

place your structures can evolve to

changing circumstances and when you're

all distributed they be kind of become

aifi especially people not at the center

don't realize that the environment is

changing and the way the team Works

needs to adapt so uh I I know that's not

a question that you posed to me but uh I

came up for me and it was important for

me to say it and now you get to Williams

looking at me in such a way you're

looking at me in such a way that goes

okay now can we bring it you've traveled

off the reservation what's funny is guy

guy and I are both so unline that I I

you know I sawed this interview with

about six or seven pages of questions

and and I immediately veered entirely

into a totally different direction oh so

you did it that's yeah no so there

there's something wonderfully uh

characteristic of guy and my

conversations where we'll literally talk

for two days days without having covered

the thing that we meant to cover and

then we'll get guilty and we uh feel

guilty and we'll come back to the main

theme so I did want to ask you about a a

very important topic that has been a

really central part of our conversations

over the last week which is this by the

way is William being bring us back on

track and I just want you to know that I

had various ways in which I could have

taken it off track I'm resisting

mightily because they're so interesting

so far you're resisting so a topic

that's that's very Central and important

I think to a lot of our our listeners

and viewers is this whole game of

long-term compounding and aquamarine

your fund is a really

interesting embodiment and illustration

of of this issue so you set it up in

September

1997 um so this is a little over 26

years ago over that period you've

averaged almost exactly 9% a year this

is through the end of of um 2023 exactly

9% a year

the the S&P I think was let me check it

was 88.3% annualized the msci was

7.1% so cumulatively the fund has

returned

874 so it's about 157 percentage points

ahead of the S&P 371 percentage points

ahead of the msci so in some ways it's a

beautiful illustration of the power of

long-term compounding like we we were

calculating this the other day and we

figured out that a million dollars in

invested at the start of that Journey 26

years ago is now 9.4 million right so in

some ways it's an incredible example of

the power of long-term compounding and

yet there's also something deeply

disappointing to you about it because

you look back and you think you know

when I started my career 26 years ago

and was influenced by Buffett I thought

I was going to make 15% a year 20% a

year and here you are at 9% a

year and in some

ways it's a it's a morality tale about

disappointment and in some ways it's a

morality tale about the incredible power

of long-term compounding can you talk

about how you've been thinking about

this whole issue of the power of

compounding the power of good enough

returns

um there's so much to discuss here what

what does this bring up for you so um

the first thing that I can say is that

um so it's I think that the word that I

used as I was making notes for before

you came William is

Bittersweet so it's sweet because it's

compounding and it's bitter because it's

not the number that I set out to achieve

and it doesn't feed my ego in a great

way and I I would say that the same way

that we were talking about the financial

crisis

chapter um I I knew I'm I probably

approached it in a defensive way anyway

because that's the nature of the human

ego but uh I I

trusted trust William enough to kind of

bring that to you and a certain way I'd

say that this conversation being willing

to share it is is an act of sort of like

tell the truth because you'll have a

great adventure in life something like

that if you want to live a meaningful

life certainly tell the truth um and I'm

I'm brought back to a question that was

asked to me by a very smart Google

engineer at the talk that I gave at the

invitation of Sarah Madan where he said

um something along the lines of and he

he probably kind of interrupted he put

his hand up in the first five minutes

and he kind of said something like how

do you know so you're so good uh you

seem to have beaten the market up to now

but maybe that's just luck no and and

again I had to be honest and say well we

we don't know and I don't know and um so

there's there's all sorts of uh uh uh

questions that I have about that so one

possibility is that uh I'm an average

investor who was lucky enough in the

first few years to outperform the market

or I may be below average investor who

was lucky enough to outperform the

market for a while has underperformed

the market for a while and actually if

we could look into the eyes of the

almighty he will reveal that over the

course of the fullness of time I wasn't

a great investor or was a great investor

I don't know what the reality is I wish

I did uh and so I have to operate within

that

uncertainty and over above that uh

within that uncertainty I have to

structure my own decisions and the

decisions of the fund in such a way that

given that I don't know what I really am

like as an investor and over above that

I don't know how reality will unfold I

want to position myself and this is kind

of a personal decision such that no

matter which one of those things is true

uh I will come out in a good way on the

other side

and so um you know we could do a sort of

Matrix of many different

possibilities in one I'm actually so

there's also referring back to a book of

our friend Ken schoenstein that I

believe you

edited you can have a good

decision-making process and a specific

say investment idea and get a bad result

because the world unfolded in a

different way and that doesn't mean that

your process was wrong that just means

that you got a bad result by contrast

you can have a terrible decision-making

process in a particular investment make

the decisions for all the wrong reasons

and end up with a spectacular result and

the idea that we have is somebody

running with a match through a bomb

Factory you might get through on the

other side but it might have all

exploded so um uh I I need to structure

my decision- making in such a way that

given that H so so I could be a good

investor and the environment was not

good for me I could be a bad investor

and the environment was not good for me

multiple different options I need to

take all of those into account uh and

all of the uncertainty about how the

world unfolds and make decisions such

that on the other side there's a there's

a good life and a happy life and you

know we were I was talking yesterday to

this um uh this this guy who's here at

valy weex who I think has got a

wonderful book Luca Deana on erist and

we can ask the question

um if you have the Ambitions as a young

person to be a movie star you know so

you're focused on I don't know Natalie

Portman or some other WTH Palos had this

super successful career but you don't

see all the people who started off who

didn't have that super successful career

who are equally good actors and

actresses who were um equally

hardworking equally talented equally

uh face for Cinema and um because the

world is an extraordinarily random place

so the question becomes if you're a

person starting off in life do do you

want to take the lottery ticket the one

in 10,000 or one in a million that you

become gwenth paltro whoever else it is

are you also willing to live with all of

the other outcomes that you might have

and and I think that you know as long as

you're happy if you don't get that start

in role and have that lucky thing that

you get that career that you're dreaming

of you're also okay if it works out in a

pretty boring way you end up being a

waitress your whole life or whatever

else it is then that's fine but when I

look at running aquamarine fund and

looking at the financial affairs of

myself my family our

investors an outcome where in some cases

of the world it's

spectacular but in other cases of the

world I blow up meaning you know and the

kind of person and there are stories

like this of somebody that I know from

the beginning of my career who put all

of all of his investors assets into one

stock the stock was called mcf and

levered with the expectation that the

price of gas would go from $2 from $4 to

$8 to $12 except it went from $4 to $2

and he's no longer running a fund that's

not an acceptable outcome for me all of

that because you feel like and I'm going

to bring this back to your original

question I believe is to say that I

don't you know so so you don't want in

the investing world I believe to say I'm

going to act in my portfolio in such a

way that I can get my 18% annualized

over the next 20 years and be super

successful when in some proportion of

the realities that may unfold that turns

into a great big zero all putting all of

your investments in one stock and

leveraging it and so the strategies that

get all of the potential outcomes to a

decent result mean that you're far more

likely say to get 9% rather than 12 15

20% and so the sweet part of the

bitterness is that survival is

everything survival of the principle of

compounding is everything that is the

most important thing not the actual

annualized rate of return and yeah if

all other things being equal I can

double the rate of return or increase it

by 2 or 3% then that's fine but they're

not equal and so I'm constantly saying

to myself and and sometimes I look at it

and and it's not a clear picture so I

can go back and and I'll hand the mic

back to you in a second I can go back

into so I had a bankruptcy

embarrassingly enough in my portfolio in

2015 that was me acting with a certain

proportion of the portfolio about 10% of

it in a way that was not very smart it

was a bit like running with the lighted

match through a bomb Factory and it did

didn't work out for me and that's not

the vast majority of the portfolio in my

case but every now and then I look at

some

positions uh that maybe that they're

great businesses but they're very very

highly valued and I ask myself am I am I

actually doing a little bit of um uh you

know constructing the portfolio in such

a way that it only works out great in

certain versions of the world and we

want it to work out at least okay in all

versions of the world I think I'm kind

of mincing my words a little bit but I

think I think I've made the point

probably too much no we're getting at

something that's really profoundly

important and I've been I've been

struggling to struggling to digest and

synthesize this myself over the last few

days because I think it I think it's

vastly important this idea you know so

many people set up the horse race of

investing where it's about okay I'm

going to get these great returns and I'm

going to beat the market and and for

most of

us that's not really that important

really what we want is to get to a

position where we're financially secure

financially independent it doesn't truly

matter whether you beat the market by

150 points over the last 26 years or 300

percentage points or or 20 percentage

points or if you if you trailed so long

as it's like a really positive result

that's getting us toward the finish line

and so I I feel like what you've been

working

towards is this much cre a clarity about

the

importance of compounding without

catastrophe long-term compounding

without catastrophe and I think one of

the reasons you're so clear about this

as a goal is that from the very start um

a huge portion of the money in the fund

and it was a tiny fund at the beginning

it was like a $20 million fund right

with million from your dad and so it was

like your dad's all of the money that

your dad had made in his entire career

as an entrepreneur

basically plus a few friends who of his

who were lawyers and stuff in

Switzerland who might not have been

invested in the Market at all and I was

one of the First Investors like a little

bit after that probably a couple years

after that in around

1999 and so having done no due diligence

except had a few meals with you over the

years and um so this priority of Simply

surviving of getting to a good end point

and

compounding and staying in the market

was hugely important to and I I don't

think this is something that most people

think about and I it strikes me that

just avoiding catastrophe and staying in

the market staying in the game

continuing to compound at a at a decent

rate a good enough rate it's

underestimated but then at the same time

there's a danger that money managers end

up changing the game that they're

playing saying that that's the game they

were playing just cuz they failed at the

game of our performing they wanted to

play I mean what comes up for me and um

is an analogy that was so helpful for me

and it's funny because we happen to be

at a ski resort and this is straight

from Luca delana's book uh so he asked

so you know the name of the game we're

in in the business of uh skiing and

being the most successful skier for the

season and obviously they're good skiers

and we're now going to take the

perspective of an individual skier who

wants to win the season and there are 10

races and uh you know as the skier he

can he can ski this is a downhill race

he can he can ski as fast as he possibly

can and there's a higher risk of uh

crashing and injuring himself and uh he

can ski slower than his top speed and he

takes a higher risk of not winning that

individual race but he um reduces the

risk that he gets injured and get taken

out of the race and I'm not going to go

through the probabilities but I think

that we can all see and in in the rush

and the excitement of the day and the

pressures that the skier feels uh

there's there's a tendency to want to

push the uh speed so that you can win

the race and the skier May doing that

win races 1 2 3 4 and five but he's

taking a cumulative risk there of injury

and as Luca puts it in the book The

skier that wins the race is not the

fastest skier it's the fastest skier

that doesn't get injured but the

individual and you've got an audience

and there it's super exciting to see the

guy skiing super fast and it's even more

exciting in a way if you get a massive

accident but from the perspective of the

skier if you can just step back and say

my goal is to survive 10 races uh then

he may ski differently and so I think

this beautifully illustrates what we're

trying to do as investors and the

pressure to try and win the individual

race is just enormous and this by the

way is is kind of like a a rule for life

in all sorts of things where what is

short-term expedient what feels like

Optimal in the day is not optimal for

the week the year and and many years so

uh and just to take it to an investing

uh um

example uh there I am at the um oh man

it's a famous hotel in uh Manhattan I

don't know why I always want to remember

these things with the specific place

it's the world of

Historia and White Mountains insurance

is giving a presentation and Jack burn

is the CEO and uh uh Berkshire Hathaway

has funded White Mountains Insurance to

BU a uh distressed insurance company

which is probably at half or less of

Book value and now while the whole thing

is still trading at less than half of

Book value white Mountain's insurance is

doing an equity issurance and Jack burn

who's redomicile this company to Bermuda

is standing there in Bermuda shorts and

I'm there as a young whipper snapper

after the presentation for the issuance

and once to ask him a question I say but

Jack it's trading at such a discount

these this share issurance is

dilutive uh we will make so much more

money if you don't do this share

Insurance why are you doing it and and

and he he basically he looked at me with

his kind eyes and and you know we've

talked about uh um his name is escapes

me this kind of like you know I mean I'm

just a nothing to him and just like

total focus on me and he says um this uh

yes if the world works out perfectly we

would have left money on the table but

if the Work World works out really badly

doing this Equity issurance ensures that

the company will survive and do just

fine and I want you to know guy that

this issurance has the blessing of our

friend in Omaha Warren Buffett and it's

just an example of of you know Warren

saying don't race as fast as you can the

name of the game is to finish the season

don't take the risk by not issuing

Equity that you might not finish the

season let's issue the equity yes we're

going to be going a bit slower but we

will definitely finish the season no

matter how the world unfolds so that's

an example of that and I would just tell

you that as I say it I think of the

decision that I made uh to stick around

in um uh in hhe head which ended up as a

bankruptcy and in that case the

equivalent analogy in White Mountains is

that I didn't do the equity issuance

because I I wanted to make as much money

as I possibly can and so that the desire

to do that even with a part of the

portfolio is very very high and what I

learned from that moment and from

Reading Luca Delana and you know

understanding his skiing analogy and

seeing the decision that Warren Buffett

made is that almost in all circumstances

don't do that

you know and and it came up at the most

recent bu hathway meeting I don't know

who I was talking to but somebody was

pretty close to the decision making in

KT Plaza and they said uh you cannot

imagine how much of Warren how much time

Warren spends just thinking about the

downside this came up in my conversation

with Chris Davis who who had um who's

now on the board of Berkshire and if

people want to check this is a

fascinating part of the the recent

podcast that I did with

where I asked him what it was like to be

in a board meeting with Buffett among

and he was saying you wouldn't believe

how much time Buffett spends talking

about the most extreme circumstances

that he's guarding the portfolio against

making sure that the company would be

okay in the event of uh you know nuclear

attacks financial crisis um you know

dirty bombs whatever whatever it might

be I thought that was a really

interesting Insight that that that focus

on resilience but what's interesting is

Buffett has this ability both to set

things up to be incredibly resilient and

then to make these incredibly bold racy

bets on things like American Express

where he put a huge so he's one of those

rare creatures who can kind of do both

but I don't think I don't think I don't

think almost anyone else can right take

that sort of intense Joe greenblack did

the same thing it's it's true I think

also did it at a different point in his

life I don't think he'd do that now if

even if he could he probably can't now

anyway

because it's it's just fascinating

because in in Warren's case 40% of his

portfolio in American Express and um you

know salad oil Scandal and uh uh in in a

way controversial situation I talked

about that sort of contro I don't like

there was controversy around it I mean

uh in a way American Express's name was

D and the ability to say actually yeah

in financial circuit circles perhaps but

as a consumer brand it's absolutely fine

and will succeed and survive and he

actually what he told I'm going to get

the details wrong but he kind of said to

American Express look it doesn't really

matter who's at fault here just pay them

out get this behind you and you'll do

fine even if you weren't at fault at all

here you just want to get this behind

you because your business will be great

and you can afford to do the payout

um yeah I mean I'm not that smart I'm

not that able to to to do that kind of

thing it seems to me I also don't know

to what extent I mean just rewinding

slightly um the the the the and the way

in which one gets started so in my case

if I could have I I'm very grateful to

be doing what I'm doing I'm

extraordinarily grateful to my father

I'm grateful that he made the decisions

that he did if I wanted to be

um if I if I could like have my past

again I think that I would have liked to

have seen how things would have unfolded

if my father had instead of dumping the

whole of his liquid net worth into me

had said look I'm going to dribble it

out x amount at a time you know you know

the my liquid net wealth the vast

majority of it is extremely safe and you

can have oversight over that and you're

going to work on growing a small chunk

of it at a high rate and I will add over

time as we get more confident in it so I

would have I think I would have been

more willing to take bigger bets at the

time and what happened with me is I mean

I was given it was it was 14 million

from these three different investor

accounts that came in and like like 50%

of it was in bonds for like five years

cuz I was so super scared and when I

went and bought my first stock for the

portfolio Duff and Fels even my father

was disappointed by how little I put

into it but out of 14 million actually I

put about two quarter of a million into

Duff and Phelps and made seven times my

money you know instead of putting say a

million in and making seven times my

money which is by the way all in the

track record it's like I've not

varnished that in any way shape or form

there's nothing that's been taken out

some people might have said oh but let's

remove the cash and just see the

performance of the equities I didn't do

any of that