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Published: July 28, 2022 at 6:00 am
In this article, Srivatsan (a regular and popular freefincal guest author) offers a different take on the lemon spoon race video which recently went viral.
Srivatsan, who would only like to be referred to as a “long-time reader” of freefincal has written several articles here before and is responsible for adding the Earnings power box feature to our stock analyser. His previous articles are listed below.
I recently shared [read as bulk WhatsApp forward] the below video and asked my friends, “what do you see from this gif”?
The majority of the responses were, “slow and steady wins the race always”. This response is not wrong, but (1) It depends on the race Usain Bolt might disagree! and (2) we can infer so much more. So, off I went on a rant to whoever cared to listen which I reproduce here.
What is a lemon spoon race?
The lemon spoon race has 2 simple rules [emphasis mine]
Einstein supposedly said:
“You have to learn the rules of the game. And then you have to play better than anyone else.”
Watch the video again.
What did everyone except the one boy do? – They shot off their marks to reach the finish line quickly – They latched on to Rule 1
What did they forget? – Rule 2
Rule 1 is your classic return maximization rule
Rule 2 is the catch – your risk minimization rule
To quote Taleb, this is a race where the risk of ruin is many-fold compared to the risk of gain. Or to quote Kahneman, the regret of lemon dropping is many-fold more than the joy of winning the race.
To go back to Einstein’s quote: this is a race that is won by minimizing the risk (lemon not falling) throughout the race and not by maximizing the return (how quickly you reach the finish line).
What did the winning boy do those others did not?
Sounds familiar?
Here are my inferences
Now you know what Prof. Pattabiraman means when he says, “risk is in the journey”; “you need to progressively de-risk your portfolio closer to the goal” and why he keeps chanting, “minimize risk” as a mantra or motto of freefincal!
Let me tell you 2 more secrets:
[Hat tip: Morgan Housel – Keep it Going]
Tl;dr version:
When you focus on return at the exclusion of risk, you try to take more risk to get the return; you get the risk but may or may not get the return.
If you focus first on the risk and mitigate or avoid or reduce the risk, then you’ve protected the downside, and then maybe you get the return. – Seth Klarman
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