Podcast
Questions and Answers
Who supplied the author with a newspaper article about chess?
Who supplied the author with a newspaper article about chess?
Bruce Karsh
What was the response to the author's memo?
What was the response to the author's memo?
Favorable
Who is a regular contributor to the Collaborative Fund blog?
Who is a regular contributor to the Collaborative Fund blog?
Morgan Housel
What is the topic of Morgan Housel's April 30 article?
What is the topic of Morgan Housel's April 30 article?
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How many businesses in Japan are still operating after more than 500 years?
How many businesses in Japan are still operating after more than 500 years?
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What is the title of the author's memo inspired by the chess article?
What is the title of the author's memo inspired by the chess article?
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What characteristic do 'shinise' businesses tend to share?
What characteristic do 'shinise' businesses tend to share?
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What creates the possibility of default, foreclosure, and bankruptcy?
What creates the possibility of default, foreclosure, and bankruptcy?
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What should be considered when determining the appropriate amount of debt?
What should be considered when determining the appropriate amount of debt?
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What happens to the range of volatility one can withstand as debt increases?
What happens to the range of volatility one can withstand as debt increases?
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What is the relationship between the riskiness of assets and the amount of leverage it's safe to use?
What is the relationship between the riskiness of assets and the amount of leverage it's safe to use?
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What is the key to surviving life's uncertainties, according to Housel?
What is the key to surviving life's uncertainties, according to Housel?
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Study Notes
The Indispensability of Risk
- The article discusses the concept of risk and debt, inspired by a newspaper article about chess and a blog post by Morgan Housel on debt.
Shinise: Ultra-Durable Businesses
- There are 140 businesses in Japan that have been operating for over 500 years, with a few reportedly over 1,000 years old.
- These businesses, called "shinise," have endured numerous wars, emperors, natural disasters, and economic downturns.
- A common characteristic of shinise is that they hold large amounts of cash and have no debt.
The Impact of Debt on Longevity
- Indebted individuals and companies are more likely to run into trouble than those without debt.
- The presence of debt creates the possibility of default, foreclosure, and bankruptcy.
- Debt is not inherently bad, but its amount should be appropriate relative to the size of the enterprise and potential fluctuations in profitability and asset value.
Potential Volatility
- Morgan Housel introduces the concept of potential volatility over one's lifetime, including market volatility, world and life volatility (e.g., recessions, wars, divorces, illness, etc.).
- With no debt, one is likely to survive all but the most infrequent and volatile events.
- As indebtedness increases, the range of volatility one can withstand narrows, until only the tamest of environments are survivable.
Volatility + Leverage = Dynamite
- The memo "Volatility + Leverage = Dynamite" (December 2008) used simple graphics to illustrate that lower debt loads allow companies to survive greater declines in fortune.
- The memo emphasized that the amount of borrowed money (leverage) that is prudent to use is a function of the riskiness and volatility of the assets being purchased.
- More stable assets allow for more leverage, while riskier assets require less leverage.
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Description
Explore the intersection of practical philosophy and investment strategies. This quiz delves into the concept of risk and its role in making informed investment decisions. Learn how to apply philosophical principles to everyday investment choices.
