Compound Emotion
Weekly essays on money, time, energy, and the decisions that compound over time.
Early in my investing career, I had a small personal retirement account where a series of aggressive options trades produced unusually large gains. I always bought options rather than sold them, so the maximum loss on each position was limited to the premium I paid, while the upside could be substantial.
At first, that seemed like a reasonable way to take risk. But the early gains didn’t just increase the account balance; they changed my judgment. As the market turned, I increased position sizes and became more focused on recovering losses than managing the account as a whole.
Eventually, I lost most of what I had made. No single trade could create an unlimited loss, but repeatedly putting more capital at risk meant that a series of capped losses could still do serious damage to the account. The stakes were small enough that I could recover, but the experience taught me that limiting the downside of an individual decision isn’t enough. You also have to think about what repeated failure could do to the system around it.
The goal is not to avoid risk. It is to avoid ruin.
I’ve experienced the other side of risk, too. Coming to the United States for graduate school was one of the biggest risks I had taken at that point in my life. My family didn’t have abundant financial resources, and there was no guarantee that studying abroad would lead to the career I hoped for.
That decision could have gone badly. I could have struggled to find work, returned to China, or discovered that the investment wasn’t worth what my family and I had put into it. But even then, I would still have had my education, my ability to work, and another opportunity to figure out what came next. The downside was meaningful, but survivable; the upside could change the direction of my life.
That distinction has become more important to me than whether something is simply “risky.” Almost every worthwhile decision carries uncertainty: changing careers, starting a business, writing a book, moving somewhere new, investing money, or asking for something we may not get.
I’ve stopped asking only, “What if this goes wrong?” I try to ask two questions instead: “What happens if this works?” and “Can I recover if it doesn’t?”
Those questions separate risk from ruin. Losing some money is different from threatening financial stability. Spending months on an idea that fails is different from making a bet that permanently narrows your options. Hearing no is different from putting yourself in a position where one no determines everything that comes next.
Working in investing has reinforced this lesson. Being wrong is unavoidable; the important question is what being wrong costs you. The strongest systems don’t require every decision to work—they leave enough capital, time, and flexibility for the next decision.
Being wrong is part of the process. The goal is to stay in the game.
There is a difference between being cautious and being protected. Caution can keep us from acting. Protection gives us enough margin to act without requiring every decision to work.
Last week, I wrote about the moment I realized I had become harder to break. I’ve been thinking about the other side of that idea since then. Perhaps the point of becoming harder to break isn’t simply to feel safer; it’s to give ourselves more freedom to take risks worth taking.
Money can provide some of that protection, but so can time, energy, skills, relationships, and the ability to start again. The more margin we have, the less every decision has to be right.
I still get things wrong, and I expect I always will. What matters more to me now is making sure that when I’m wrong, I still have enough left to make the next decision. Maybe the goal was never to build a life where nothing goes wrong, but one where things can go wrong without changing everything.
P.S. What’s one risk you’re willing to take because you know you could recover if it doesn’t work out? Just hit reply—I’d be interested to hear how you think about it.
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See you next Tuesday.
Bill