Financial planning lessons from a lemon spoon race

In this article, Srivatsan (a regular and popular freefincal guest author) offers a different take on the lemon spoon race video which recently went viral.

Srivatsan, who would only like to be referred to as a “long-time reader” of freefincal has written several articles here before and is responsible for adding the Earnings power box feature to our stock analyser. His previous articles are listed below.

• We spotted a “Multi-beggar” stock 3 years back – You can, too!
• Forget Buffettisms/Mungerisms: try these 2000-year-old personal finance tips!
• Financial lessons from our childhood stories!
• Ten Amazing Similarities between Poker, Stock Markets and Life
• It’s Earnings That Count: Forget the next Infy; Can you identify the next Satyam?
• PMC Bank Fraud: Lessons from Sanjay Gulati’s story
• Automated Earnings Power Stock Analysis With Screener.in data
• Want financial success? Budget time & energy before money!
• Are you a DIY investor? Be careful what you read and how you apply the stuff.
• If BJP loses Lok Sabha Election 2019, will the stock market crash?

I recently shared [read as bulk WhatsApp forward] the below video and asked my friends, “what do you see from this gif”?

The majority of the responses were, “slow and steady wins the race always”.  This response is not wrong, but (1) It depends on the race Usain Bolt might disagree! and (2) we can infer so much more. So, off I went on a rant to whoever cared to listen which I reproduce here. 

What is a lemon spoon race?

The lemon spoon race has 2 simple rules [emphasis mine]

1. 1. You place a lemon on a spoon. Hold the spoon in your mouth. Whoever reaches the finish line first – wins the race

• If the lemon falls before you cross the finish line – You are out of the race

Einstein supposedly said:

“You have to learn the rules of the game. And then you have to play better than anyone else.”

Watch the video again.

What did everyone except the one boy do? – They shot off their marks to reach the finish line quickly – They latched on to Rule 1

What did they forget? – Rule 2

Rule 1 is your classic return maximization rule 

Rule 2 is the catch – your risk minimization rule

To quote Taleb, this is a race where the risk of ruin is many-fold compared to the risk of gain. Or to quote Kahneman, the regret of lemon dropping is many-fold more than the joy of winning the race. 

To go back to Einstein’s quote: this is a race that is won by minimizing the risk (lemon not falling) throughout the race and not by maximizing the return (how quickly you reach the finish line).

What did the winning boy do those others did not?

1. Throughout the race, he was focused on only one thing: The lemon should not fall 
2. He took measured steps (call it slow if you want): He took the maximum possible stride which would propel him forward at the same time not make the lemon fall off 
3. For three-quarters of the race, he was the only person left to run the race. He still had a long way to go! If he had dropped the lemon, he would have still lost! 
4.  Also note, that he had to sidestep other failed contestants, people cheering, egging him on right in front of him. His steps became even shorter, he was watching the lemon even more! 
5. If you notice, he did not end up in the same lane where he started! He was so focused on the lemon, that he veered to the right and switched lanes 

Sounds familiar? 

Here are my inferences

1. The lemon can be your health, wealth, career, <insert any aspect here important to YOU>. In fact, we are running multiple lemon spoon races at best; or a race with multiple lemon spoons in one mouth at worst. Watch that lemon carefully! 
2. The length of stride you can take yet not make the lemon fall off is in essence your return vs risk decision. How fast you need to go, how fast you can go, how fast you want to go, and how fast you are forced to go are all different things!  
3. Whether there are other people around or not does not matter. It is not a race vs others. It is not even a race. It is you, your finish line, your lemon, your journey. It is not a straight-line shortest path from starting point to the ending point. You can veer off, come back and course correct.
4. The race is won by taking measured, sustainable steps with every step just long enough to move forward yet safe enough for the lemon, till you reach the finish line.

Now you know what Prof. Pattabiraman means when he says, “risk is in the journey”; “you need to progressively de-risk your portfolio closer to the goal” and why he keeps chanting, “minimize risk” as a mantra or motto of freefincal!

Let me tell you 2 more secrets:

1. There is Rule 3:
   1.  If you change lanes during the lemon spoon race, you are disqualified!
   2. The boy actually did not win the race! Never lose sight of facts/fundamentals especially when faced with compelling emotionally stirring narratives (a.k.a viral/WhatsApp forward tempting) or logically convoluted /rambling writing like this one 😊
2. There is also Rule 4:
   1. In real life, it is OK to drop the lemon, go and retrieve it, resume the race, find another lemon, stay out of the race, or go find an orange.
      1. After all, it is your life and your lemon. You make the rules, and you play your game better than your former self.

[Hat tip: Morgan Housel – Keep it Going]

Tl;dr version:

When you focus on return at the exclusion of risk, you try to take more risk to get the return; you get the risk but may or may not get the return.

If you focus first on the risk and mitigate or avoid or reduce the risk, then you’ve protected the downside, and then maybe you get the return. – Seth Klarman