Your Worst One Percent: The Art of Playing Defense

Whitney Tilson’s email to investors, sharing an excerpt on “Your Worst One Percent,” from his upcoming book, The Art of Playing Defense.

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Q3 2020 hedge fund letters, conferences and more

Following up on yesterday's e-mail about the calamity of losing your reputation, here's another related excerpt from my upcoming book, The Art of Playing Defense:

Seth Klarman: Investors Always Need A Strategy To Guide Them

Volatility"Many investors lack a strategy that equips them to deal with a rise in volatility and declining markets," Seth Klarman told his audience in a speech at MIT in 2012. Q3 2020 hedge fund letters, conferences and more Klarman was talking about the benefits of having a strategy, such as value investing, to provide a Read More


Your Worst One Percent

It's important to understand that you aren't judged for the way you behave 90% or even 95% of the time, but rather on your worst 1% – or even 0.01%.

To my knowledge, David Sokol, a senior executive at Berkshire Hathaway (BRK-B), had never done anything unethical in his long career before his fateful purchase of Lubrizol's stock – just before he recommended that CEO Warren Buffett buy the company, which he did – ruined him. That's all it took.

In my two decades as a hedge fund manager, I made thousands of trades. To my knowledge, all were ethical and proper, but if even one hadn't been, I could have been ruined as well.

One misjudgment is all it takes, so avoid gray areas. Never go near the line. Be ultra-conservative when it comes to your integrity and reputation.

This applies in every area of life. You can be a kind and generous person almost all of the time, but if you make one blatantly racist or sexist remark (even if you're not racist or sexist), that's what you will be remembered for.

Even if you've been faithful to your spouse for decades, if you go to Vegas one weekend, get drunk, and have a one-night stand, you've likely permanently ruined your marriage.

The implications of the worst-one-percent reality are sobering. Everyone makes mistakes, but in some areas, you simply can't afford to make any.

There are many things you can do to avoid this kind of calamity. First, mistakes are far more likely if you're sleep deprived or under physical, mental or financial duress, so if at all possible, avoid taking important actions or making big decisions under these conditions.

Be careful who you associate with, both personally and professionally. Their behavior and reputation will rub off on you and vice versa.

And never assume that something is private or off the record. Other than perhaps the most intimate conversations with your closest friends and family, assume that everything you write and say is being recorded and could be made public. E-mails, in particular, live forever, so it's best to assume that someday they will be read by a hostile journalist, regulator, investigator, or lawyer. It's happened to me a few times and it's no fun.

Best regards,

Whitney