The Tale of Two Merchants: Why Avoiding Big Losses Matters

Centuries ago, in the bustling trade city of Venice, two merchants, Marco and Luca, each operated fleets of 20 merchant ships. Their prosperity depended on safely transporting valuable goods from Venice to Alexandria, reinvesting profits, and expanding their fleets.

Marco was daring, choosing high-risk routes offering higher annual growth of 14% in prosperous years but risking severe 25% losses during occasional stormy years. Luca was cautious, opting for safer routes with a lower annual growth rate of 8.5%, experiencing smaller 7% losses during stormy years.

To illustrate how impactful these differences can be, consider a scenario without any losses:

• After 20 years, Marco’s 20 ships growing at 14% annually would have grown dramatically to 275 ships.
• Luca’s 20 ships growing at 8.5% annually would have reached approximately 102 ships.

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Clearly, Marco’s potential returns appear far superior. However, reality includes occasional losses. Here’s their actual journey over 20 years, grouped by cycles (each cycle begins with one loss year, followed by several growth years):

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Final Comparison After 20 Years

• Luca’s fleet: 55 ships
• Marco’s fleet: 51 ships

Despite Marco’s significantly higher growth rate, Luca’s cautious strategy ultimately produced greater results due to consistently smaller losses.

The Investing Lesson

This historical tale highlights a critical investing principle: avoiding large losses significantly enhances long-term growth and stability. Protecting your investments from severe downturns helps achieve steadier, more predictable outcomes and greater peace of mind.