Paranoia is GOOD

Sept 11, 2001 is a date now etched in the history of world and minds of countless Americans.

As the world commemorates the death of thousands of innocent civilians who were simply minding their business and going to work when being hit in an unanticipated attack from terrorist, it opened the eyes of everyone from everyday people to politicians to the perils of terrorism and its ability to disrupt life as they knew it.

Trust-in systems; leaders; environment is what makes life a series of consistent events.

Even an alarm bell that has been set by a person him/herself has the ability to raise the blood pressure which just tells us how vulnerable human beings are to unanticipated events and what would they not do to avoid it given a choice.

However, history tells us that human actions are often disjointed and undertaken without the prescience of their cumulative impact.

When large systems move, they have a habit of visiting all parts of the space they exist in, in a random but uniform manner.

The 2008 Financial crisis was a prime example of several thousand individual trades coming together to create a crisis large enough to impact the entire world.

Human beings instinctively try to create safety nets around themselves, whether it’s by means of family, community, being part of corporation or in today’s world on social media.

These safety nets have a tendency to create an impression that “All is Well” and can be managed without the realization of how flimsy these can be.

An element of mis-trust in the system, its components, fellow human beings instead of blind reliance on the flimsy safety nets can go a long way in mentally preparing people for risks that they don’t’ see.

Risks-We Don’t’ See

Yes, these are the only real ones that we need to worry about.

Any risk that can be anticipated can be prepared for, its only what you don’t see that you cannot prepare for.

Take Covid-19 for example, no one was prepared.

From recklessness to ignorance to fear, helplessness to despair people went through all possible emotions as the crisis generated by Covid hit everyone either physically, financially, mentally or all of the above.

Andy Grove (Former CEO, Intel) used to tell his colleagues- “Only the paranoid survives”.

This is a highly positive statement-no one can possibly predict all risks.

Anyway, as soon as a risk is predicted, it is no longer a risk as you can figure out a way to deal with out.

What Happens?

The only way to hence prepare for unanticipated risk is to make sure that you have hedged your bets and diversified your resources, businesses, capital, investments enough for you to get to fight another day.

Take your investments, when the markets are up, mood is good, portfolio is going up every-day, all prospects are positive and there is nothing to worry about.

Suddenly life goes in a tailspin as markets fall 10% every-day for a few days.

Nothing is suddenly good, sky is about to fall, world is coming to an end.

You surely see the extremism.

Then the tide turns, and everyone vows to never repeat such irrational behavior.

Again, the markets are up, everything is hunky-dory, mood is good!!

You get the drift.

What to do?

As Andy Grove said-get Paranoid.

De-risk yourself.

Don’t give up on your asset-allocation even if it is frustrating to live with low returns in a major part of the portfolio.

Remember this is the part that will give you a chance to fight another day.

Also remember to follow the following discipline when everything is fine:

  1. Have an asset-allocation.
  2. Write down thesis for every decision.
  3. Re-visit the thesis periodically to check if things are in order.
  4. Be prepared to exit a decision if the thesis does’nt turn out the way you anticipated.
  5. When a crisis visits, re-visit your thesis and evaluate the basics of your decision, if the thesis stands tall, maybe it’s time to take the bull by the horn and add to your position.

Lastly when things go back to normal-you go back to being “Paranoid”

2 thoughts on “Paranoia is GOOD

  1. Superb Last Lines… Go back to being Paranoid! Excellent learning why it is important to be cautious. Give in yourself to the process of investing… everyone knows it is cyclic, but no one knows when cycles will turn! Keep them coming!

    Like

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