Dear reader, have you ever heard of someone called Erich Weisz? Probably not. To be honest, even I had never heard of him before I started writing this piece. But you have probably heard of Harry Houdini, who lived through the late nineteenth and the early part of the twentieth century. In fact, after becoming a professional magician Weisz started calling himself Houdini. Of course, Houdini was much more than just a magician. As his Wikipedia entry points out, he was an “escape artist, illusionist, and stunt performer, noted for his escape acts”.
One of Houdini’s famous acts was to invite the strongest man in the audience onstage. He claimed to be an amateur boxer and said that he could withstand any man’s punch without really flinching. This story is recounted by Morgan Housel in his new book Same As Ever. As Housel writes: “The stunt matched what people loved about his famous escapes: the idea that his body could conquer physics.”
After one such show in 1926, Houdini invited a bunch of students to go backstage with him. This included an individual called Gordon Whitehead, who walked up to Houdini and started punching him in the stomach without any warning. He was being playful and thought he was recreating the same trick that he had just seen Houdini perform on stage. The trouble was Houdini wasn’t prepared for the punches that came. In the normal scheme of things, he would be flexing his solar plexus, steadying his stance and holding his breath. But at that point he wasn’t. As a result, Houdini’s appendix ruptured and then he died.
This, as Housel writes, was a person who was tied in chains and thrown into the river and came out alive. He was buried alive in sand and could escape in seconds. All because Houdini while performing his stunts was prepared and had a plan. But Whitehead’s punches took him by surprise. He got punched when he wasn’t expecting to be punched. The point Housel is trying to make through Houdini’s story is that the biggest risks are always those that one doesn’t see coming. Such is life. And herein, as we shall see, lies one the biggest lessons in personal finance.
When the covid pandemic broke out, many individuals lost their jobs. Quite a few youngsters had next to no savings because they had assumed that they would continue to work, continue to get a salary and continue to spend money. But then that’s not how it worked out. The pandemic was a risk which almost no one could see coming. It was an unknown unknown—human beings did not know that they did not know that this would happen.
So, it always makes sense to have some money in savings bank accounts and fixed deposits. The proverbial rainy day may not come, but if it does you will be prepared for it. As Housel writes: “It’s better to have expectations that risk will arrive, though you don’t know when or where…So, in personal finance, the right amount of savings is when it feels like it’s a little too much.”
Along similar lines many people with dependents don’t buy term insurance, simply because they think that an accidental or an early death is something that happens to other people. Then there are others who argue that if they live out the term of the insurance, the premium paid is wasted. Well, the premium paid is not wasted, it’s the cost of being prepared for a risk that may never arrive.
In fact, the entire act of diversifying investments fits in beautifully here. Quite a few individuals chase performance, depending on whatever is the flavour of the season. When bitcoin and crypto were fashionable some youngsters bet a good part of their savings on it. It looked good while it lasted and made those who had money in fixed deposits, look stupid, at least briefly.
Of course, while the going was good for crypto, those who had money in fixed deposits earned very low-returns in comparison to those who were busy punting crypto. But then that was the cost of being ready for the risk that could arrive someday. And it did, in the form of crypto prices crashing, scams being revealed and governments cracking down on it. While all these things could be predicted in advance, no one knew when they would play out.
Further, many investors like to wait for forecasts before they start planning for risks. While it is not very difficult to identify most risks that can shut down a good investment story, almost no one knows when a risk is likely to play out. Which is why it is important to remember something that Nassim Nicholas Talen writes in The Black Swan: “Invest in preparedness, not in prediction. Remember that infinite vigilance is just not possible.”
Vivek Kaul is the author of Bad Money.
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Updated: 27 Nov 2023, 10:41 PM IST
