I'm no Warren Buffett

Decisions, decisions.

Every day we make a thousand different decisions. Some have little to no impact. Some reverberate across a lifetime.

We can make a bad decision and win. We make a good decision but suffer losses. Good decision making does not always lead to good outcomes and vice versa. What we can do is try and make objectively good decisions over time and over a large enough number of decision points, the iron law of large numbers takes over. Ms. Fortune and Lady Luck have less of an impact over a large enough sample size. The skill in making a good decision take over. Ask any good poker player.

We also choose one outcome as an insurance against the possibility of other outcomes. You choose education as a form of insurance against poverty. You choose to eat healthy as a form of insurance against sickness and bad health.

Choices can also be more frivolous and confounding. For instance, I once chose to wear a dress to a costume party at a mate's place while at university (yes - sometimes even I am amazed by my own questionable choices). It was a form of insurance against not fitting in. Bad idea. The outcome was my backside really did look big in that dress! Fitting in to fit in, then realizing, not fitting in because… well, not really fitting in, if you get my drift. The irony of it!

And that’s us mere mortals. Even the famous amongst us make decisions based on a form of probabilistic insurance. Warren Buffett and Benjamin Graham, the fathers of value investing talk about margin of safety in investing. The basic concept being buying shares in a company whose share price is heavily discounted to provide a buffer. Easy to say but harder to do. We are all trying find some edge that provides some perceived value to us.

And this brings me to choices about work, margin, and safety.

Margin for Safety

The choice to work for others is also a decision but not in the way you think. When we are employed, we not trading our time for money which is the conventional wisdom. What we are really trading is time for margin. It's a margin for safety trade-off. Wait what? Let me explain it.

We are trading our margin (which is the difference between value generated by a business minus input costs - our wage) for the safety in receiving a regular income. We are effectively making a probabilistic decision that we are better off under these conditions. In return businesses utilize our skill and effort in their margin or value creation efforts for profit.

Value Creation Is Not Easy

So why don't more of us set out on our own to capture the margin? Value creation is hard. The margin can only be produced because a business is able to organize resources, processes, and systems in precisely the right combination, that solves a problem, people are willing to pay for. It's hard (but not impossible) to do this as a single individual. Business is less Wolf of Wall Street and more Hunger Games except, you are not Katniss Everdeen, and the odds are not in your favor. 90% of business fail in 5 years.

I am not suggesting that you don’t work for others. Working in organization with a good team of people for a common purpose is extremely rewarding and less risky (but not totally risk free). All I am suggesting is you be aware of the true nature of the decision you are engaged in.

Think of it this way. You are a continuous long call option for a business. Your wage is their premium. The business has already figured out how to be profitable, so they are continually exercising their option and obtaining the upside (margin) while paying you the premium.

Ultimately, we are all just trying to make good decisions. Depending on where we sit, we have three different approaches to value creation.

1. Investors make margin of safety decisions,

2. Employees make margin for safety decisions and

3. Owners make safety for margin decisions.

Which one are you?

Me? Well, I'm no Warren Buffett. All I know is that me and dresses don't fit. There just isn't enough margin of safety ;-).