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Let me start with just a few thoughts on the ongoing tariff deal that we're going through. I don't know what to call it. Tariff debacle, tariff situation, whatever it might be. One of the greatest assets that any person or company or country can have is trust among other people. Do people trust doing business with you? But what's hard about that concept is that it's very difficult to measure trust, particularly when you have it. When you lose it, you realize how valuable it was. But when you have trust, it really doesn't show up on anyone's balance sheet. You can measure the value of your stocks and your bonds and your real estate. Where is trust on your net worth statement? And again, that's true for a person, a company or a country. And I looked it up this morning. How much do foreign investors have invested in the United States? How much have other people around the world who don't live in America invested in the United States? Take a second to guess what you think that number might be because it was higher than I thought. The number is, as of June 30, 2024, about $32 trillion. That is just in marketable securities, stocks and bonds. It doesn't include real estate, office buildings, just in tradable securities, roughly $31 trillion. It's about $17 trillion in stocks, $13 trillion in long term debt, and one and a half trillion in short term debt that international investors who don't live in the United States have invested in their A big part of the reason that they do that is because we have been a trustworthy place to do business with a state of clear, easy to understand laws and rules. And regulations so that when you park your money, invest your money in the United States, you know it's a safe place to invest your money. One of the fears, one of the worries, and I am not even close to the first person to bring this up, many people have brought this up, is that when you start a trade war like this, it erodes trust among international investors, and they look at the United States and say, maybe it's not as trustworthy of a place to do business as I thought it was, and maybe I should move my money elsewhere. In the last week. Now, this is, as I said in the last episode, going so far against what I would normally talk about in the last couple days is that you've seen a fairly substantial and quick decline in the value of the US Dollar. There'd be a lot of reasons for that, one of which is foreign investors looking at the United States and saying, maybe I should move my money elsewhere. Now, I have no idea what's going to happen next. I'm not making any predictions about what might happen next. But the general idea that trust is one of your most valuable assets and you don't know how much it was worth until it was gone is a pretty important concept individually and for countries, something that I'm thinking about as I watch what's going on with tariffs. But I want to get into today's episode now, which is about risk. And of course, this might be pertinent as we're dealing with the tariff issue and what's going on in the economy, but I think it's also pertinent all the time. The most important concept in finance and dealing with money and investing in particular, is risk. And not just with money, but in any avenue of your life that you're dealing with, your career, your relationships, your health. So it might be one of the most important topics in life that you deal with, but it's a topic that is not often taught in schools or when it is, it's taught in a very mathematical way, not in a way that you could really think about dealing with it in your own life. So let me just share with you a couple of thoughts that I've always had about risk and I've written down over the years to try to help myself when dealing with uncertainty in the world. One is that uncertainty amid danger is a very uncomfortable feeling. When the world feels dangerous and you don't know what's going to happen next, that is a feeling that can make people go nuts. So to deal with that, it is very comforting to have strong Opinions about what's happening, even if you have no idea what you're talking about or what's going to happen next. Because shrugging your shoulders and saying I don't know when you know there is a dangerous situation feels reckless. It feels reckless to do that. Very complex things are always uncertain. The economy, the world, it's always uncertain. And uncertainty feels dangerous. And having an answer to what you think is going to happen next makes the world feel less dangerous, makes it feel like you're doing something. And so we want firm answers about what's happening when things are the most uncertain, which is when firm answers about the future don't really exist. And I think you're seeing that over the last couple weeks. By the way, I might be guilty of this as well. Having opinions about what is going on at the, at the current moment, whenever the world feels broken and maybe you feel like your personal financial situation, a small business that you own is in danger. That is when people have the strongest opinions about they know what's going to happen next. Here's what the tariffs are going to do. Even if it's situations like that, when what's going to happen next is actually the most uncertain, it's the most unknowable during any certain time. One other way to think about that is that uncertainty shrinks your field of vision at the worst possible time. Because when the world changes every couple of hours with different headlines that are coming out, it becomes hard to think more than 24 hours ahead. So what happens over the next 12 months, the year ahead is impossible to envision. When assumptions that you had at breakfast were destroyed by dinner time. And so the irony is that long term thinking is the most powerful. When the world is falling apart, when the stock market is falling apart, that's when you want to be a long term thinker. But that is when it becomes the most difficult to actually do because you are literally just attached to the news headlines trying to figure out what's going to happen between now and lunchtime. Right. One other thing I think about a lot is that it's very hard to preemptively know how you're going to respond to risk. If you asked investors a month ago, how would they feel if the stock market fell 20%? So many of them would say, oh, that would be great, like stocks would be cheaper. That would be an opportunity. I would love to buy more. Please give me that. That's an opportunity. But when something like this happens, it's easier to say that a month ago than it is to Actually do it now because one month ago it was impossible to contextualize what was going on in the world. It was impossible to contextualize how you would feel as a small business owner or as an investor, given the amount of uncertainty that we have right now. And so quoting Warren Buffett during a bull market is easier than being brave in the face of a real time worry, real time uncertainty. Something else I wrote this down during COVID five years ago now is that it's, it's okay to admit that we will get through this and that this is a big deal. Those are not mutually exclusive because it's always tempting to want to put yourself in one or two camps. It's either like pure panic, pure pessimism, or pure optimism. This is either the worst or the best thing that we've ever done. The gray area in between always feels uncommitted, and people don't want to feel uncommitted because it's hard to distinguish uncommitted from unaware or oblivious. But in so many situations, that is probably the most reasonable position is to be in the gray area. And having a barbell personality of optimistic on one side and paranoid on the other is helpful in a world where long term success like punctuated by moments of panic is the norm. One other quote that I think is really great comes from this German psychologist named Gerd Geiger. And he wrote many years ago that quote, people are not stupid. The problem is that our educational system has an amazing blind spot concerning risk literacy. We teach our children the mathematics of certainty, like geometry and trigonometry, but not the mathematics of uncertainty or statistical thinking. And we teach our children biology, but not the psychology that shapes their fears and desires. Even experts, shockingly, are not trained how to communicate risk to the public in an understandable way that can apply to so many topics, including what we're going through right now. One last thing that I wrote down many years ago before I get into the longer part of what I want to talk about is that having backup plans and safety nets and flexibility and room for error was just as important two months ago as it is today. If you're a business owner or an investor, it's just more obvious today that you need room for error and flexibility in your thinking and in your plans. And I would challenge you to remember that when this is over that the time to have room for error and cushion and backup plans is when things are going well. It's not when things hit the fan, so to speak. All right, so some more about risk with Some ideas that I had thought about in 2018 and wrote down when I was trying to come up with a framework for risk in my own life and how to think about risk, because it's actually not easy to define what risk is most of the time. In finance and investing, risk is defined as volatility. But if you can put up with normal, run of the mill volatility, is that a risk? If you can endure it, it's like rain outside. Is rain a risk? Like, I don't enjoy it, but I can endure it, I can put up with it. So it's not really risky, it's just a thing. And so defining what risk is in your life is actually more difficult than you might think. And it's different from person to person. But to me, I think risk management starts with this idea that Jeff Bezos came up with many, many years ago called the regret Minimization framework, which he said, you should try to picture yourself at age 80 or age 90 and looking back on your life. You want to minimize the number of regrets that you have. And a regret is different than a challenge or a mishap or a period of misery or even a disaster. Most people can deal with all kinds of nonsense and challenges. That hurts today, but maybe you don't regret it tomorrow. So a lot of what seems risky today, you won't even remember tomorrow, let alone when you're 80 or 90 years old. But once you frame risk as wanting to avoid long term regret, then the question becomes, you know, who cares what's hard, but I can recover from? Because that's not what I'm worried about, it's what will you regret. And people can regret completely different things in life when they're looking back. So risk is never a blanket metric, because what looks crazy to you might be something that I'd regret if I didn't try. People can have different risk tolerances in the same category, like volatility. Volatility in the stock market that's easy for you to endure, might not be for me, and vice versa. But there are other categories that one person may regret that another wouldn't even think about, like embarrassment or prestige, all kinds of different topics. And this is why risk can be such a heated debate, and why one person's thoughtful decision looks crazy to somebody else. But even given that, I think there are some regrets that tend to be universal. Some areas of risk management that I think everyone should pay attention to. One is making a decision that cannot be easily reversed. So you always want to think about decisions that you cannot reverse in the future. One of those, I think, as we talked about earlier, is trust and reputation, which once you lose, it is very difficult to get back. Something else are making decisions with downsides that are so severe that it prevents eventual recovery. So getting wiped out, getting banned, getting blacklisted, getting convicted, severe reputational harm. You'll regret decisions by and large, that lead you there because their stench will stick to you long after you try to scrub them off and move on. Something else to think about. And so risk management, I think, comes down to serially avoiding decisions that cannot be easily reversed, whose downsides will demolish you and prevent recovery. I think that's. That's like the most fundamental way to think about risks. I'm going to repeat that. Risk management comes down to avoiding decisions that cannot be easily reversed, whose downsides will demolish you and prevent recovery. I think that's true for investments, for business models, for careers, for relationships, all kinds of things. And when you frame it like that, then risk management doesn't seem that complicated. It's much simpler when you frame it in those terms. The first thing that I think you want to do, given that, is value having options in life. I remember a driver's ed class where the instructor said something like, no matter where you are on the road, always have enough room to stop and pull over. And I think life gets dangerous when you're boxed in with limits on how you can react to something that you did not expect. And so you will regret wanting to do something but not being able to do it because you didn't have enough options in your life. The second thing is like a religious appreciation for unknowns, for how uncertain and how fragile the world can be. There's all kinds of stuff out there that you don't know about happening in the world right now that you and I are unaware of. So unknowns are dangerous because even if they're small, your lack of preparedness to deal with them is like an embedded form of leverage. This is the basis of wanting options and having an out in. In whatever you're doing is that there are so many things out there that you're not prepared for. And so once you appreciate those two things, like having options and appreciating unknowns, then I think risk becomes much more clear. As we all sit here trying to make sense of the world and always have. This is nothing new, and we'll be doing it in the future, 10, 20, 30, 40 years from now, with whatever new thing we're dealing with, then that's always how I try to think about risk in my own life. I want to have a lot of room for error in my finances and in my psychology. Room for error of not putting too much emphasis on being certain that some things will happen because we know that's not how life works. And having an appreciation for how fragile and volatile and fickle the world can be. Because I and you are one of 8 billion people in this world making decisions, most of whom we can't see what they're doing or have insights into the brain and what they're thinking. And a lot of whom have more power and leverage than we might think, either because of their position in the world or because of just the chaos theory of one benign person doing something that they cannot foresee the consequences of in the future. And so risk, again, I think, is the most important topic in finance. And. And it's usually not until we experience a risk like so many of us have in the last couple weeks, that we take some time to think about it. So I've been thinking a lot about it, and hopefully you will, too. That's it for this episode. Thanks again for listening, and we'll see you next week.