Never forget the six-foot-tall man who drowned crossing the river that was five feet deep on average.
Howard Marks repeats this mantra over and over in his writings. What does it mean?
Prepare not only for what happens on average but also be ready for the inevitable surprise.
When building our business, we must be aware of the tail-end of risk. Aware of the most improbable event.
It is not enough to survive what should happen, our business must be ready for what could happen. Inevitably a shock will occur.
How do I prepare for tail-end risk?
• Keep a healthy cash reserve
• Do not over-leverage
• Pay close attention to terms of any leverage
• Monitor cash flows and detect inefficiencies
If you notice, all my points revolve around cash and debt. Why?
Because I believe that if a business has enough cash and low to no debt, it can weather any storm.
If we invert that and run our business with tight cash levels and lots of leverage, it is easy to see how we may fall victim to the same trap as the six-foot-tall man crossing the river.