There are two types of conservative: the kind where you avoid risk, and the kind where you broaden your definition of success. The first is about limiting the potential outcomes to something certain. The second is about opening up to a range of acceptable outcomes, also called having a margin of safety. The distinction matters in business plans, investments, our careers, and even in war.
When the Germans headed towards Stalingrad in WWII, they had 3,400 tanks ready to dispatch their opposition. The plan was conservative in that it was a bet on one confidently estimated outcome: that they could quickly and comfortably overwhelm the Russians with this quantity of force. The Germans soon learned that the Russian army wasn’t their greatest threat, but the Russian winter was. The gas lines in the tanks froze. The tanks they “dug in” to insulate from the cold had their electric wiring chewed by field mice.
The conservative German plan was fought and lost in part by soldiers and tanks, but mostly by winter and field mice. This is the risk to our first definition of conservatism: overconfidence in one objective with narrow awareness or acceptance of other potential outcomes. They had not considered a margin of safety and it cost them severely. Outside of war, we find similar examples of careers who are stagnant out of fear of change, businesses who can’t evolve, and cash only savers who never invest. What if we could just broaden our thinking? What if we could just expand our definition of success?
Conservative with a margin of safety is a first step. What if instead of just going into Russia, they had packed some warm clothes and antifreeze (note: thankfully they didn’t, but you get the point)? What if, in a career, a person looks at adding additional duties to their current job to open doors to new paths without upsetting their current role? What if the cash-only saver takes the interest they earn and invests it slowly and diligently over time? None of these are terribly risky, but they open substantial doors to more potential outcomes. They add a margin of safety to an already conservative approach.
We can’t let conservative have only one meaning. We can’t let fear dictate our willingness to explore a range of outcomes. To be overconfident or singularly focused on one outcome is to let the winter roll in and risk the field mice getting into our wiring. As Warren Buffett says on having a margin of safety, “It’s better to be approximately right than precisely wrong.” It’s OK to be conservative. It’s OK to be more risk-averse than others. But, it’s also our responsibility to make sure we have a margin of safety. More things can happen than will happen. Accept it. Start there.
h/t Morgan Housel. These concepts (and many more) are found in his exceptional book, The Psychology of Money.
Read more posts based on Housel’s work here.