Increases are of sluggish growth. But the way to ruin is rapid
– Seneca, Roman Philosopher
At its very core the Seneca Effect is a model that proposes that decline is usually way faster than growth. I am not proficient enough to get to the math of it but let us view this as an overarching concept and apply it to some domains.
LTCM (Long Term Capital Management) steadily amassed an amazing track record for many years before the 1998 bond market rumbles brought them down.
The recent story of Archegos capital is something similar. A USD 20 Bn fund went out of commission in no time.
Victor Niederhoffer and Masayoshi Son took decades to become who they are but they came close to blowing up in matter of weeks. Niederhoffer in fact blew up not once but many times. No doubt they believe in playing a high-stake, high-risk game but the timeframe in which risk works positively and the timeframes in which risk can work negatively are never comparable.
Below are the price charts of two very promising Indian businesses (in the assessment of the market) before the stories came crashing down.
Think this happens in just markets? Well, let us look elsewhere too.
These are arguably some of the greatest MMA (Mixed Martial Arts) professionals in their weight categories. What is common to all of them? They were unbeaten for a long time but once they saw their first defeat, they were never the same again. The skills, heart and discipline were all the same as before; the results however were drastically different.
The Greek Phalanx military formation dominated the battlefield for a long time but once the world figured out how to beat the formation it was never a dominant force again.
Blackberry took years to dominate the enterprise smartphone market but once the market tipped it was game over very soon.
As an entrepreneur in the Chinese Ed Tech market, you would have taken almost a decade to get to where you were. Everything came crashing down in a matter of weeks once the Govt decided to change regulations and go after tech entrepreneurs with an iron hand.
Kirill Shamalov rose to business superstardom and prominence in Russia over a long period of time, thanks in part to him marrying Vladimir Putin’s daughter. Post 2018, once his marriage went sour, he lost more than 50% of his net worth within months.
Dinosaurs were wiped out by a single event after dominating the world for thousands of years.
What can we do to reduce the chances of this effect getting to us?
- Some patterns and behaviors work brilliantly till they stop working one fine day for whatever reason. Never let success get to your head to such an extent that you believe it was all about you. Those with the highest levels of conviction in themselves are usually the last to accept the bitter reality that the world has moved on.
- Diversify your interests, skills and resources. This prevents you from maxing out gains in one particular area but that is a small price to pay to avoid financial ruin.
- View the world and your interactions through the lens of power and leverage. Even if you are the CEO of an organization, if someone else has a lot of leverage on you, your continued success is at his/her mercy. You may be successful but very fragile. Real power is the extent to which you can pilot the direction of your own life. As Taleb says once you get to “Fuck you money”, you should always retain walkaway power. That is what money is meant to do anyway, it may not buy you happiness but it does avoid most unhappy situations.
- Always calibrate to the situation, do a periodic reset in your thinking to ensure you do not miss the forest for the trees. When change happens, it can happen rapidly thereby making you irrelevant. The world does not owe you anything, even if you’ve worked decades for something. Nature is ruthless, efficient and self-serving. Rhonda Rousey read the signs and went to the WWE from MMA and she is raking in more money than she ever could at UFC. Do not go the way of a few of India’s lady CEOs at banks. They could have exited gracefully and kept their reputations intact, they did not and became examples of the bad kind.
- Do not fall in love with anything to such an extent that you cannot imagine life otherwise. Goes for your personal relationships too, your wife/husband/child should never be your entire damn life. I have seen cases where parents turned their lives upside down for their children over decades only for the children to turn out to be ungrateful, entitled brats.