You Can’t Average Out Ruin: A River, A Portfolio, and What Matters

A six-foot-tall person decides to cross a river whose average depth is five feet five. The margin looks adequate. Mid-crossing, the river deepens without warning, footing disappears, and the person drowns.

The story is usually told as a warning about averages, which is fair as far as it goes. But it does not go far enough. The lesson is not merely that averages can mislead. It is that survival does not consult them at all. Survival is sequential, path-dependent, and absolute. You survive each step, or the process ends. There is no averaging across outcomes when one of those outcomes is terminal.

The parable’s power is in the asymmetry it reveals. The river need not be deep everywhere; only somewhere, and only once. The person crossing, by contrast, must be adequate everywhere, continuously. One requires a single moment; the other an unbroken sequence.

Markets work the same way.

The Illusion of Competence

For much of my early investing life, I treated markets as an intellectual arena where insight, originality, and narrative skill mattered most. I wanted to see what others missed and to express that vision through confident, differentiated positions. I wanted to be right, naturally. I also, if I’m honest, wanted to be interesting.

When conditions make things easy — when liquidity is plentiful, correlations behave, and volatility remains subdued — it becomes difficult to distinguish genuine skill from favorable circumstance. Shallow water invites confidence. Easy footing suggests permanence. What feels like competence is often nothing more than the absence of strain.

We credit ourselves for what was quietly supplied by conditions. The trader who prospers during an expansion praises his discernment; the portfolio that survives a mild downturn congratulates its prudence. Both may deserve some credit. Both are also beneficiaries of luck. The environment whispers flattering compliments, and we are human enough to listen.

At the time, I understood risk mainly as a statistic to be diversified, modeled, or smoothed away. I had not yet absorbed that markets are governed by exposure unfolding through time, and that time, which looks neutral on a spreadsheet, proves ruthlessly selective in the real world.

The Shape of the Distribution

The river in the parable is reduced to a single number. But a river is a distribution. Its average depth tells you very little about what matters. What matters is the shape: how uneven the bottom is, how abruptly the depth changes, and whether the deepest points remain survivable when encountered without warning.

This is where ergodicity matters, despite the intimidating syllables. In an ergodic world, averages across many participants approximate the experience of a single participant over time. Toss a fair coin often enough and your results converge on the mean. Markets are not like this. They are non-ergodic. The order of events matters. A single sufficiently bad outcome can end the process entirely, no matter how attractive the average appeared.

You cannot average out ruin.

Once this is understood, much of conventional portfolio theory begins to look theatrical. Modern Portfolio Theory optimizes along the efficient frontier as though the frontier holds still while you cross it. Expected returns lose their authority. Backtests reveal themselves as exercises in survivorship bias — the financial equivalent of interviewing only those who made it safely across the river.

Two rivers can share the same average depth and pose very different dangers. One varies gently, allowing adjustment as conditions change. The other shifts abruptly, from ankle-deep to overhead in a single step. The averages are the same. The experiences are not.

So it is with portfolios. Two strategies may promise the same expected return while differing radically in their tolerance for error. One is forgiving, allowing for mistakes, recalibration, and learning. The other is brittle, offering no second chances and punishing error with extinction.

That difference marks the real divide between amateur and professional thinking.

Knowing Without Respecting

Amateurs optimize for what is most likely to happen. Professionals worry about what happens if they are wrong — early, repeatedly, and at the worst possible moment. The amateur asks what he expects. The professional asks what he can survive.

I understood this distinction long before I respected it.

I had read the books. I knew the terminology, the historical examples, the cautionary tales that populate every serious text on risk. I could discuss drawdown thresholds and position sizing with apparent fluency. But this was knowledge as decoration — something to be recited, demonstrated, deployed in conversation to signal seriousness. It had not yet migrated from my vocabulary to my instincts.

The concepts remained academic in the precise sense: they lived in case studies and historical charts, safely distant from any position I actually held. I understood that leverage could kill you. I simply did not believe it would kill me. The distinction seemed trivial at the time. It was everything.

That respect arrived in 2022.

When the River Deepened

Until then, my experience had unfolded during a period when the river was cooperative. Drawdowns appeared and retreated, and even mistakes tended to mend rather quickly.

In 2021, the current was strong enough to feel even when one knew better. The narratives were everywhere: remote work had permanently restructured society; the metaverse was the next internet; virtual reality would redefine human experience. These were not arguments so much as incantations, repeated until repetition substituted for evidence. When everyone nods in agreement, it becomes remarkably easy to forget how persuasive crowds can be when they are mistaken together.

I followed. Thoughtfully, or so I told myself. But I followed.

The change came from elsewhere. Interest rates rose. Suddenly the calculus changed. Distant promises — five years out, ten years out — were worth less when discounted back to the present. The metaverse wasn’t disproven; it was simply revalued downward by mathematics more patient than enthusiasm.

What unsettled me most was not the market’s behavior. It was my own.

The mistakes were not fatal, but they were instructive. We did not drown. But we took on water. And even a brief loss of footing leaves a mark that smooth crossings never do.

I had assumed that a plausible story must be true, and that a widely shared belief must be durable. Both assumptions failed at once. The difference between holding an opinion and bearing responsibility became unmistakably clear.

That year marked my real coming of age, not as an investor, but as a risk manager. I learned that the relevant question is never whether you can survive the median outcome. It is whether you can survive the draw from the distribution that drowns many.

What Fiduciary Duty Actually Means

The transition from managing one’s own capital to stewarding others’ is often described as technical. It is more accurately described as moral. But even that formulation understates what changes.

When I began managing money for others, I thought my job was to help them make money. This sounds reasonable until you examine what it implies. It led me to chase outperformance — to prove my worth through returns that exceeded benchmarks, through calls that looked prescient, through boldness that read as conviction. I wanted clients to look at their statements and feel fortunate to have found me.

This was not dishonest, but it was incomplete. Performance mattered — still matters, certainly. But I had mistaken the scoreboard for the game. What matters is not returns in isolation but the structure of those returns: how they were earned, what risks were borne to achieve them, whether the path to get there was survivable if repeated. Risk-adjusted returns, yes, but that clinical phrase obscures something simpler: whether you can sleep at night, and whether your clients can too.

The question is no longer whether I can deliver an impressive number. It is whether I can deliver that number without requiring luck at precisely the right moment, without exposing capital to ruin, without making survival contingent on things going right in sequence. This is less heroic than chasing alpha, and vastly more difficult.

The river does not grade on style points. It does not care that your reasoning was elegant or your conviction authentic. It cares only whether you made it across. Fiduciary duty means accepting that your clients are not paying you to be interesting. They are paying you to reach the far bank with their capital intact.

When the capital is not yours alone, error changes its magnitude. Being wrong is no longer a private inconvenience to be rationalized over whiskey; it becomes a shared exposure and a breach of trust if approached carelessly.

The questions changed accordingly. Not whether an idea was clever, but whether it was forgiving. Not what needed to go right, but what would happen if things went wrong. Not how to maximize returns in theory, but how to remain intact long enough for time to do its work.

These questions rarely produce dazzling forecasts. They do not flatter the ego or enliven cocktail parties. But they are the questions that separate professionals from amateurs, the difference between those who survive the full cycle and those who are interviewed only in the first half.

Here is what fiduciary duty amounts to: you do not get to experiment with other people’s money, and you do not get to be interesting at their expense. In a non-ergodic world, seriousness is not optional.

What Survives

Survival is not the purpose of investing. But it is the condition that makes every other purpose possible. Only what endures can compound. Only what remains intact can benefit from time. And time, unsentimental and incurious, offers no refunds for insight unaccompanied by wisdom.

This is the truth softened by theory and obscured by averages: markets do not reward intelligence in the abstract. They reward strategies that tolerate error without collapse, judgment without heroics, humility without paralysis. They reward those who understand that the worst draw from the distribution is not hypothetical — merely undrawn.

The river does not advertise its deepest point. It does not negotiate with confidence. It does not care that the mean looks favorable.

It waits.

You either reach the far bank.

Or the accounting stops.