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Skin in the Game

Nassim Nicholas Taleb, the guy famous for writing a series of books that covers topics like investing and brushes up against related topics like philosophy used the term “skin in the game” as a title for one of his books.

In the book Taleb describes the importance of having “skin in the game” when it comes to decision making. The argument is that with it, decision-makers are forced to scrutinize decisions in a way that leads people who don’t have “skin in the game” to make poor decisions.

In investing you can see how the argument plays out with investors like Warren Buffett. His entire net worth is invested in Berkshire Hathaway, the company he runs. I can’t remember exactly but he only takes a salary of around $100,000/year. If there ever was an easy measure of “skin in the game” it’s how CEO’s compensate themselves. Buffett sets the bar.

Like sport, investing yields strength from loss

For me personally, I know that had I not started investing on my own I never would have been as successful as I am. For example, had fear not pressured me to pass on the opportunities available after the 2008 Great Financial Crisis I never would have had the courage take advantage of them in 2020 when Covid panic hit the stock market.

Once learned, those lessons are immensely profitable but until you’ve actually tasted them… they’re just theories. In 2008, I was aware of the rule “be greedy when other people are fearful” but I still couldn’t bring myself to buy stocks. Only later, after feeling the loss from missing out, did the lesson penetrate me in a way that allowed me to act fearlessly the next time the opportunity came.

I’m still learning these valuable investing lessons like opportunity cost. I groan every time I think of how I got out of the great turnaround story that is Chipotle Mexican Grill. However, none of these lessons really mean anything until you’ve experienced them and for that you need skin in the game.