Cap the Downside
Rule #1: Don’t lose money.
Rule #2: Don’t forget about rule #1.
These are Warren Buffet’s famous rules about investing and this concept has been adopted by other supremely successful investors. Buffet is obsessed with finding investment opportunities that have potential for large upside return but also carry a minimal downside risk. In sexy finance terms, he is seeking scenarios with asymmetrical risk to reward. In plain English, he avoids situations where he can lose his shirt.
If buying a rental property is only financially sustainable if the market continues to go up and if it’s 95% occupied, don’t do it. Using leverage in real estate can make you a ton of money but if it goes south, it can get really nasty, really fast.
Warren wouldn’t be caught dead in Southpark Bank Savings and Loans.
While this is a sound concept for investing, it can also be tremendously useful when applied to other important areas of your life. To do so, think about the realistic worst case scenario in a given situation and take action to make it impossible, or at least not so terrible.
For example, when my nightly sugar craving kicks in and I notice my hand lingering over the ever-present bag of chocolate covered peanut butter filled pretzels in our pantry, I’ve made it a rule to immediately blend a protein shake and have that first. It’s chocolate flavored and so sometimes it soothes my sweet tooth, which is the best case scenario. But if I still need the real deal afterwards, I dig in. This makes the worst case scenario of filling up on treats and not having room for the shake impossible.
Of course, a better way to cap the downside would be to stop buying the pretzels altogether but I’m a human being, not a fucking robot.
Similarly, I’ve recently made it habit to use the 30 minutes between ordering a Hungry Howie’s pizza and the arrival of said Cajun crusted delicacy to bolt down as much healthy food as possible. It turns a seven slice night into a four slice night and also helps minimize my crippling pizza anxiety.
“Let’s see, four adults and five kids…two mediums and a small order of breadsticks should be fine, right? Jesse, are you OK? You look like you just saw a ghost.”
The same tactic can be applied to your fitness. Don’t have those doughnuts until after you go to the gym. If you’re lucky, the endorphin rush from working out or spending an hour around a group of people trying to get in shape will give you enough motivation to pass on the crullers. But if not, you still avoided the worst case scenario of skipping exercise entirely and your metabolism is revved up to fight back against the impending caloric tidal wave.
Younger DadBod Destroyers, what would this look like applied to planning for your career? Taking on a ton of student loan debt to get a credential required for a job that you may end up hating has a substantial downside. Cap this downside by getting exposure to the day-to-day life of someone who actually does what you are considering doing.
Volunteer at a law office before taking the LSATs.
Pay an accountant for an hour of her time to talk about what an average week is like during tax season.
Get a summer job in an outpatient clinic and ask any doctor who will listen about their favorite and least favorite things about their job.
If you are deeper into your working years, apply this mental framework to decisions about whether to start a new job or launch a new project.
My decision to start this blog is a perfect example. Let’s say in some terrible alternate universe, I lose my drive to share DadBod busting mindsets/tactics and tire of writing about personal finance (sorry for the ridiculously outlandish hypothetical but I’m trying to make a point). Sure, I would be out a few hundred bucks in domain fees and website design expenses but I would have significantly improved my writing abilities, learned about social media advertising and networking, clarified my thoughts related to the most powerful personal development lessons, and continued to chip away at the latent perfectionism/risk-aversion that I’ve struggled with since adolescence. Even if the project was ultimately a bust, I would end up with better tools in my toolkit than I had before.
I’m not suggesting that you avoid any situation with more than a modicum of risk. Whether you’re investing, charting a new course for your career, or committing to improving your relationships, you often need to assume more risk to increase your chances of a larger reward. But you should be on the lookout for when taking a simple step makes the worst case outcome impossible.
Seek out situations where you can cap the downside and proceed with caution where you can’t.