One of Prof. Sanjay Bakshi’s most profound talks in on fragility and optionality at India Investing Conclave. It is one of those ideas that grabbed me, shook me and made me see the world in a whole different way.

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Fragility means being susceptible to be broken. Glass is fragile; it can break easily. By putting a glass at the edge of a table, it enters a fragile state. That is, one knock intentional or unintentional can make it fall and break. Just one light knock and it’s game over for that glass. On the other hand, if you were to place a tennis ball at the edge of the table and if you knock that down, that ball will simply bounce off the floor and not break. So the event of knocking off is the same. But the outcomes are very different for the two.

I want to not be like the glass where just one knock, intentional or unintentional will break me.

So- don’t be like Remi Lucidi. Remi was a daredevil. He would climb skyscrapers, tall bridges and do pullups, do stunts on moving trains etc. And he had been successfully doing these things for at least years. Unfortunately, he died when one of his stunts went wrong. Just one mistake and it’s game over. Those are the kind of games or situations you want to avoid where one mistake and you are dead or out of the game. And it doesn’t even have to be a mistake on your part; it could be simply bad luck. It does not matter how successful you are or if you are an expert. But why place yourself in situations like that in the first place? In fact, the more successful somebody is at a dangerous game, the more you should avoid him/ her.

A while ago, I wrote about Gable Plotkin who had also been successfully shorting companies and earning outsized returns for himself and his clients. And one shorting gone wrong (GameStop) meant it was game over for Gabe Plotkin. Was that bad luck? Sure. But then, why place yourself in situations like that?

I live in Bengaluru. And honest, good, smart and sensible people turn 100% idiots when driving an automobile. Like talking on the phone while driving, like not wearing helmets and seatbelts, like driving on the wrong side, like texting while driving. And as if that wasn’t enough, some of those idiots combine all the above: texting while driving on the wrong side of the road in the rain. No kidding…I have seen such idiots. These are your Gabe Plotkins and Remi Lucidis in the making. They have been successful at the wrong game and it’s only before their luck runs out.

Recently, I was a passenger in a car where we driving back from Chennai to Bengaluru at midnight and the driver was someone who had no education in risk. While I made it back home safely, I swore to myself to never again put myself in such fragile condition (night driving + bad driver + road under construction).

Stock markets are risky, like Indian roads. Just as you can’t live in India and avoid driving, you can’t afford to not invest in stocks. Therefore you need to train yourself in safety – to avoid risky and fragile situations, to settle for lower returns, if need be, but to never compromise on safety.

And let me clarify- we cannot 100% eliminate all risks of fatality. We do need to cross the road, we do need to use trains, planes and automobiles etc. And therefore we need to do them with mindfulness and caution.

And what applies to the risky and chaotic Indian roads applies to Investing as well. We need to approach it with caution and humility. So we need to have a reasonably diverse portfolio, we need to avoid borrowing money and investing in stocks and we absolutely must not short.

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The opposite of fragility is optionality. In fragility, you cannot make any mistake. In optionality, you can make tons of mistakes and still not be wiped out. In fragility you need to get unlucky just once for the game to be over. In optionality, you need to get lucky just once or twice to see some insane wealth.

Jeff Bezos is somebody who understands this. At Amazon, he says, they start tons of experiments with small capital. And a majority of them fail. But they double down on the ones that show promise. For example: AWS, Kindle, Prime, Fulfilment by Amazon were spectacular success despite the failures in say the Fire Phone. As of today, AWS is estimated to be worth in the range of $1 to $2 T USD whereas all of Amazon including AWS is worth $1.8 T by market cap. So imagine, just one of your experiments working out well and now contributing to nearly 100% of your net worth. Or let’s put in another way- you can afford to fail at 99% of everything and still make trillions of dollars. That is the power of optionality. You just need to get lucky once.

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I am an investor. And my job # 1 is to make good decisions. Most people think the job of investors is to earn returns. But what most people don’t know is that a big part of the job is to avoid risks as well. Concentration of investments in one stock is risky, so I diversify. Investments with dubious promoters is risky, so I avoid them. Investments in companies affiliated to political parties is risky, so I avoid them. Investments in businesses I don’t understand is risky, so I avoid them. In my humble world view, it’s okay to earn less returns so long as you don’t flirt with risk. If you give up the notion that it is okay for others to make more returns than you, you will be in a lot better place. You are unlikely to do stupid things and therefore more likely to be a survivor.

To thrive, I look for businesses that like Amazon are willing to try new things with limited capital. Experiments will frequently fail and when they do, it shouldn’t cost too much. But when they do, they can pay off handsomely. One of the companies where I invested in IEX. This is a company that innovates and comes up with new products. In 2020, they launched a new product called Real Time Market. Four years later, this product now contributes 30% to the topline and is their fastest growing product.

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To summarize: to survive you need to avoid fragility and to thrive you need to have optionality. And you can’t thrive without surviving first.