Warren Buffett
You find out at low tide
Risk shows up late, on purpose
Berkshire letters, 1992 and 2001
In a rising market every stroke looks good. The question is how to see the risk while it is still invisible.
What actually happened?
He used the picture repeatedly: only when the tide goes out do you discover who has been swimming naked. It points at a structural feature of risk. Leverage, mismatch and luck do not just stay hidden during a boom — they amplify returns, so the naked swimmer is the fastest one in the water. Which is why his own disciplines are all counter-cyclical, and why Berkshire has carried an amount of cash that looks like underperformance for years at a time.
Boom-time returns have risk premium mixed in
Whoever is beating the market may be doing it with skill, or by carrying more leverage and buying less insurance. On the statement the two are indistinguishable. So read a result by asking what is left of it once the borrowing and the exposure are taken out.
The fund's three great years were one leverage decision made in the first of them, and nobody separated the two.
Put the trunks on while the tide is in
Looking for protection at low tide means paying peak prices for the things that are scarcest in a crisis — cash, insurance, credit — if you can get them at all. Every protection has to be bought while it is not needed, which is exactly what makes it hard.
The credit line arranged in the good quarter cost almost nothing and was the reason the bad one was survivable.
Put the tide going out into the model
You cannot know when it turns, but every decision can be run through the test: funding stops, the largest customer leaves, rates double — does this still stand? What does not stand is fragile however much it is currently earning.
Half of revenue came through one channel, and the plan for that channel closing was a sentence nobody had written.
How do I use it today?
Where you are: things are going well and the returns look like skill.
Ask first: run it through one low tide — funding stops, the big customer leaves, rates double. What is left standing?
Where it goes wrong: reading it as a reason to hold cash forever — the point is buying protection early, not declining to swim.
Lines to keep
What cannot survive the test is fragile, however much it is earning now.
Same situation, other people are asking
The more rules I add, the more people route around them.Everyone is chasing the same thing. Where is nobody standing?Every hour is booked and one delay wrecks the week.The numbers look great. Is that skill or is it leverage?I'm managing it and it's getting worse · all 14 questions →If this one named what you are going through,
send it to someone who needs it, or keep it somewhere you will find it again.