What Nuclear War Teaches Us about Investing

Every year citizens of America (and the world) live with the risk of nuclear war.  Ahmadinejad of Iran and Kim Jong-il of North Korea are just a couple of the known risks of an atomic warfare.  The Nuclear Non-Proliferation Treaty (NPT) of 1970 has sought to reduce spread (proliferation) of nuclear weapons in which nearly 200 countries have signed on and so far it seems to have worked.

As it stands, the threat of nuclear detonation year-to-year is likely not 100%.  But at the same time it’s definitely not zero.  But let’s say there is 10% chance of a nuclear bomb detonating every year.  That means within 30 years there is a 95.8% chance a nuclear bomb will explode. If the odds were true and you’re fifty or younger, you will likely live to see a nuclear bomb go off in your lifetime at least once.

Now let’s use the same analogy for your investments.  If you were told to put all your net worth in an investment that has a 25% return annually over 30 years, but ran 10% risk of complete loss annually, would you do it, or not?  A 25% annual return equates to an 80,779% compounded return, however, you run a 95.8% chance you will lose your entire principal.  And remember, when you’re back to zero, 25% of zero is zero.

A small risk compounds incredibly over time.  As Warren Buffett says, “Don’t risk what you can’t lose for what you can’t have.”

By |2018-12-13T23:50:48+00:00May 24th, 2010|Uncategorized|