Professional Growth

Protecting the downside is bullshit!

Written by Moritz Schröder

If you ever  immersed yourself into the cosmos of investing, you will soon have learned about the golden rule of investing, the rule that people like Warren Buffett live by: always protect your downside.

The idea is simple. If you have an investment through which you can gain alot, but lose almost nothing, then this is a great thing to invest into. It is very unlikely that you will lose money in the long run.

Of course this rule makes intuitive sense. And because it makes so much sense, it is tempting to apply in other areas of life than just investing. People talk about “protecting the downside” all the time now, and in very different contexts. Thinking about taking a new job and consider what you can gain or lose through it? Protect your downside! Thinking about making a business deal? Protect your downside! Do you want to make a move on someone you have had a crush on since forever? Think about your downside first!

And yes, in many scenarios this makes perfect sense. Make sure to minimize your potential losses.

The problem with this mindset though is that it usually rules out all the options that have the greatest upside potential as well! There are no situations in life, may it be in investing or any other field, where the option with the highest reward has no risk involved. Yes, it is possible to get rewards while basically taking no risk for it. But are those the highest rewards? Or merely the mediocre options?

So many people try to ‘play it safe’ way too often in life. They try to protect their downside and end up missing out on great opprtunities, simply because they are way too risk averse.

What I ask myself is this: Why do so many people so passionately protect their downside? Let’s have a closer look at what this downside really looks like.

If you have a somewhat similar background to me, you grew up in an industrialized country. Your family might not be rich, but is also far from being poor. You have a rather big group of friends. You have a college degree and speak at least two languages.

Now, if you share these commonalities with me, the absolute worst thing that can happen to you (at least from a financial/professional pooint of view) is this: You lose your job; You are broke; You have to live off of social welfare; You might even have to move back in with your parents.

This is what the ‘downside’ for all of us looks like. This is literally the worst case scenario. Boohooo, big fucking deal! You don’t work for a little while, you get money from the government during that period, and eventually you find a new job. Really not that big of a deal actually, right?

So then please tell me why every single person seems so concerned with protecting the downside, and as a result of that fails to take big risks that might bring giant rewards!?

Let’s face it: as an educated person in an industrialized country, we are the winners. This is pure luck, but it is also a fact. Whatever we decide to do, we always have a safety net and it is almost impossible for us to take risks that are so enormous that they really threaten our existence.

So why not take risks? Why not strive for excellence instead of settle for mediocrity? Why not play to win instead of playing to not lose?

People are so damn scared of failing that they forget that even failing hard has no truly horrible outcome in our society and this day and age.

So take a look at your career. Think about the boldest move you could possibly make. And then just do it. You might feel like you should play it safe, like you should protect your downside. But be aware that really, the downside is not so bad that it is even worth protecting against.

Published in Professional Growth

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