The Risk-Free Rate of Return on Life

Take chances. It may be bad, but it's the only way you can do anything really good. – William Faulkner.

I think one of my most formative classes for me in college was "Investment Analysis" with Professor Wilis Hulings. He was an old-school wall street guy that decided to get out the game after the 2008 housing crisis. People jumping off of buildings after losing their savings and their jobs because of wild financial speculation - he just didn't want to be a part of that game anymore. True to form, his philosophy on investing, formed by his trauma of the event, is as tight as a drum.

He always drilled us to play long, never try to time the market, and assess the value of a stock based on consistent, verifiable, and well-reported trends and earnings. Over the long run, he would always tell us, you are always better off just sticking close to the S&P. As much as I respect him, and believe him to be one of the most brilliant people I know, I have failed to heed his advice (he would probably ream me if he saw my portfolio of event-driven and crypto positions).

But there is one thing he taught me that has always stuck with me. It's that when you consider whether you want to make an investment with any sort of risk or uncertainty associated with it, you must compare it with the risk-free alternative. When you compare the gains of your risky option with the risk-free option, you need to ask yourself "does the gain I make with the risky option justify not taking the risk-free option?" If the gain is substantial enough, it can justify even a low likelihood of realizing the gain.

For example, if someone offered you investment A with a potential return of 1% and 0% risk against Investment B with a potential return of 1% and a risk of 90%, then you would always take investment A, right? But what if Investment B had a potential return of 90%? Would you still take Investment A? At the end of the day, assuming these are the only options, that is up to your own risk appetite and the goals you set out for yourself. The right answer really relies on how you feel about it.

You can extrapolate this line of thinking beyond financial decisions and into your life decisions. Nietzsche has his eternal recurrence. Goggins has his rocking chair. I have my risk-free rate of return on life. When thinking about taking a chance on something - on anything, ask yourself "am I okay not taking any risk at all here? What would my life look like at the end of the investment horizon if I took absolutely no risk? Am I okay with that?" If the answer is no, take the leap. Even if it doesn't work out, it was still the right decision.