Over time, investment results tend to say less about intelligence than about how carefully risk is handled. Also over time, anyone who allocates capital tendsto develop a sense of how they’re trying to win.
This is clear to see in tennis. At the professional level, points are often decided by winners. The players are skilled enough that if you don’t go for it, your opponent will.
At the amateur level, it’s different. Most points aren’t won by hitting winners (they’re lost through mistakes). If you can keep the ball in play long enough, chances are your opponent will miss first.
Investing seems to work the same way. Some investors emphasize upside. They structure their portfolios around capturing exceptional outcomes (this typically comes with accepting tighter margins of safety, higher leverage, or greater sensitivity to timing in exchange for the possibility of outsized wins). When executed with skill, discipline, and the right environment, this approach can be very effective.
Others focus on avoiding mistakes. They accept that they may miss certain upside moments, but structure their approach so that errors are survivable and capital stays in the game. Neither approach is right or wrong. Risk management starts with being honest about which game you’re playing.
Our job is to play defense (but only after making sure we are playing the right game in the right arena where the returns will naturally take care of themselves).
In our case, that arena is billboards, real estate, and secured lending. Not because these arenas are risk-free, but because their economics are tangible, their cash flows observable, and their failure modes understandable. They are environments where time and returns can work in your favor (if risk is managed deliberately).
In football, great defenses aren’t built around predicting the exact play that’s coming. They’re built around limiting what can hurt you no matter what the offense calls. A defensive coordinator doesn’t assume the quarterback will make a mistake. He assumes competence and designs the scheme so that even a well-executed play results in a modest gain, not a touchdown.
Some of the most important defensive work happens before the play starts. Capital structure is one example. How much leverage is used. When debt matures. Whether obligations depend on refinancing or outside liquidity. These decisions determine whether a good asset has room to survive surprises (or whether it needs everything to go right).
Once a deal is operating, defense becomes a daily routine. Much of it looks mundane, but it compounds. Over time, certain questions keep coming up:
None of these items increase upside in a spreadsheet or make a deal look exciting.
But this is how risk is taken off the table play by play. Good defense doesn’t stop the other team from gaining yards. It prevents blown coverages, short fields, and game changing scores. When large losses are avoided, the math of compounding does the rest.
Most people think of investing as a positive art (finding the next great opportunity, the clever insight). In most cases though durable outperformance is often a negative art.
It comes from what you exclude. Large drawdowns are mathematically unforgiving. A 50% loss requires a 100% gain just to return to even. A 70% loss requires more than triple. These are not just numbers (they’re compounding paths that are extraordinarily difficult to recover from).
Avoiding those outcomes matters more than capturing every upside.
One pension fund manager shared that over a 14-year period his equity portfolio never finished above the 27th percentile nor below the47th percentile in annual returns. Yet over that entire period, the portfolio’s cumulative performance landed in the top 4th percentile of all peers, even without ever posting spectacular annual results. This happened because it avoided bad years that permanently killed capital, allowing compounding to work uninterrupted
Risk means more things can happen than will happen. Most possibilities never occur, but uncertainty comes from not knowing which one will.
There is an old Mark Twain quote that’s right at the center of risk management “It’s not what you don’t know that gets you into trouble. It’s what you know for sure that just isn’t so.”
The most dangerous environments are those where confidence is high, outcomes feel obvious, and skepticism feels unnecessary. In those moments, leverage rises, standards soften, and the margin for error isn’t discussed or underwritten. Underwriting hard assets requires focus less on precise forecasts and more on how much can go wrong before the investment breaks.
Playing defense (in the right game where returns take care of themselves) isn’t about avoiding risk it’s about taking risks that can be understood, absorbed, and revisited over long periods of time. When permanent losses are avoided, compounding is allowed to work uninterrupted, and small differences in outcomes begin to matter a lot more.
With simple compounding at 12% per year, $100,000 grows to roughly $3 million over 30 years. At 9% (about what the stock market has averaged over the past three decades) that same $100,000 grows to roughly $1.3million, less than half the outcome from just a few points of difference.
Context matters, though. Today’s market starts from very different valuation levels. With price-to-earnings ratios around 30 and total market value around 220% of GDP, forward-looking returns have historically been much lower. In similar valuation environments, subsequent 10-year returns have often fallen in the range of roughly –2% to +2% annually. In environments like this, the difference often comes down to choosing where compounding has room to work and where it doesn’t.