Paranoid Optimism
We showed up at the office on the morning of October 1 to learn that (1) 47,000 East Coast dockworkers were on strike (with union boss Harold Daggett having previously declared ominously to the country that “I will cripple you); and (2) Iran was set to imminently launch a barrage of ballistic missiles at Israel (which it proceeded to do). Further, this was happening amid a consequential presidential election with Vice Presidential candidates JD Vance and Tim Walz getting set to debate later that evening (fortunately with no mention of invaders eating pets, though there’s apparently a real problem in San Francisco) and on the heels of a Hurricane Helene decimating parts of the Southeastern United States.
“Happy Q4!” Emily declared.
Not long after that I learned that one of our portfolio companies was contemplating making a multimillion dollar investment, which made for an interesting juxtaposition of how to think about long-term capital allocation amid uncertainty.
The fact that the S&P 500 stock index is up about 70,000% since its 1957 inception is one good reason to remain long-term optimistic when it comes to capital allocation. After all, there have been a lot of crises between 1957 and now that have clearly been worth investing through.
That said, there’s a reason why there is an old investing saw that advises to never invest more than you can afford to lose. Because it’s precisely because of unanticipated events such as hurricanes, war, and labor strikes that any investment one makes can at any time decline in value.
Where does that leave us?
Back when I lived in DC I was told that if I was ever asked a politically charged question but wanted to avoid a politically charged discussion to reply that “I am cautiously optimistic cooler heads will prevail.” (Try it, it works!) And while that’s kind of a throwaway line in that context, the term “cautiously optimistic” struck me as a clever and pragmatic turn of phrase. I thought it nicely described the idea that if you stay engaged with the world on honest and fair terms that while bad things will happen, you should stick around because most outcomes are pretty good.
But as I’ve gotten older and gained experience (I also learned on October 1 that I have been six years (!) with Permanent Equity), I’ve come to understand that cautious optimism is probably too passive of an approach. Instead, I’d describe myself now, at least when it comes to capital allocation (and maybe some other things), as paranoid optimistic (though always being careful to never let that optimism become skepticism, cynicism, or pessimism because that would be no way to live).
What’s paranoid optimism? I think it’s the idea that if you stay engaged with the world on honest and fair terms that while bad things will happen, you should stick around because most outcomes are pretty good but that when bad things do happen, a lot of them are likely to happen all at once so in order to be able to “stick around” you better take time on the front end to structure your downside protection so at any moment you can withstand a pretty big broadside.
“Happy Q4!” indeed.
– Tim
