The Investor with the Best Brakes Wins

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• The investors who win over time are the ones who can slow down at the right moment and survive every turn.
• Real resilience protects compounding by helping portfolios survive correlation spikes and sudden stress.
• Strong brakes give you the confidence to take smart risks and capture the big opportunities that shape long-term wealth.

Inspired by our recent conversation with our friend Dave Dredge who reminded us that in racing, the fastest driver is not always the one with the biggest engine or the lightest car. It’s typically the one with the best brakes. Good brakes let you enter a corner at full speed because you know you can slow down at exactly the right moment. They give you the confidence to explore the edges of the track rather than tiptoe around them. In a long race, that confidence compounds.

Investing works the same way. What separates the portfolios that thrive over decades from those that stumble is not really the ability to predict what happens next. It is the ability to survive whatever happens next. Good brakes are what allow an investor to take intelligent risk. They are the difference between a portfolio built to explore and one built to fear.

The irony is that many investors spend their time trying to optimize the engine. They look for the perfect stock, the clever factor tilt, the alternative strategy that promises just a little more horsepower. Far fewer focus on the more important question: What happens when the track changes?

Survival is the foundation of compounding, yet survival is not always what people optimize for. A portfolio without brakes looks efficient during calm laps and can look brilliant in the backtest. It looks smooth and predictable when the sky is clear and the pavement dry, but when the weather shifts and the corners tighten, that same portfolio becomes fragile.

The market rewards resilience. It punishes fragility. Over a lifetime of investing, that difference dwarfs every clever trick.

The Compounding Path That Few Measure

What matters most isn’t the average return. What matters is the path your capital takes to get there. Two portfolios with identical average returns can finish in much different places depending on how they handle big gains and big losses.

This’s where resilience shows its power: A portfolio with real brakes can lean into the right tail of opportunity and can withstand turbulent periods without being forced to sell. It can even accelerate into periods of dislocation while others pull back. Small behavioral differences become large mathematical differences.

The opposite is also true. A portfolio that cuts off its own upside to feel “safe” ends up hurting itself. Many investors cap gains in exchange for the illusion of lower risk. They give up the very fuel that powers long-term compounding while keeping all of their downside exposure. That’s like installing a governor on your car to limit speed while leaving the brakes worn and unreliable. It feels prudent until you reach the first difficult turn.

What destroys compounding paths isn’t necessarily bad years. It’s the combination of limited upside and occasional catastrophe. A small number of extreme outcomes drive the difference between wealth and disappointment. The investors who capture the upsides and survive the downsides win, while the rest fall behind.

The Risk No One Measures

Most risk conversations revolve around familiar buckets: equity, rates, FX, credit, inflation. But the biggest risk rarely lives inside one of those silos. It lives between them: It is the surge in correlation at precisely the moment investors need diversification most.

Diversification is typically discussed as if holding many different assets ensures safety. But most assets in the modern world move to the same underlying rhythms. Trillions of dollars of equities, bonds, private equity, private credit and real estate all share common drivers so, when the system is under stress, those drivers converge.

Correlation tends to go unnoticed until it becomes unavoidable. A portfolio that looks diversified in fair weather can behave like a single concentrated bet in a storm. That jump in correlation is not a theoretical problem. Rather, it’s the force that turns ordinary drawdowns into lasting financial damage, and it is the force many investors forget to measure.

A resilient portfolio is built to survive correlation shocks, with elements that behave differently when everything starts moving together. It includes assets that thrive when leverage unwinds and it includes true diversifiers that are not only low correlation on a spreadsheet but negative correlation in moments of stress.

Brakes are not there for the straightaways. They are there for the moments when everything tightens at once.

Looking Where Others Do Not

Some of the best opportunities for resilience lie where few people look: Volatility in foreign exchange markets. Complex optionality tied to interest rates. Convex instruments buried inside structured products. Those corners of the financial world can be ignored because they feel unfamiliar, but they are also where supply and demand imbalances can create powerful mispricing.

In certain markets, corporate hedging programs generate constant supply of options. In others, structured product flows suppress volatility for years. In some, regulations encourage behavior that looks stable on the surface but hides enormous tail risks underneath. All these forces can create moments where the price of protection detaches from the true level of vulnerability.

Value investing in volatility is no different from value investing anywhere else. It begins with price. When protection is being sold for too little because an entire ecosystem is incentivized to ignore the tail, resilience is on sale. When the cost of convexity collapses, it becomes the most attractive asset in the market.

But cheap is not the same as good value. Some markets stay suppressed for long periods because the supply is deep and persistent. The art is not only finding low prices but understanding why they are low and knowing who is supplying the volatility, how they are hedging, what pressures sit behind them, and what events can force a change. The most durable resilience is built from optionality that is inexpensive and structurally mispriced.

When the Future Cannot Look Like the Past

Each generation of investors faces a world that feels familiar on the surface but much different underneath. Today’s difference begins with demographics, as many developed countries are moving into an era with fewer workers, fewer savers and fewer taxpayers. That shift affects everything from economic growth to government budgets to the cost of capital.

For decades, policymakers relied on financial repression to soften economic challenges. Low interest rates supported asset prices. Wealth effects supported consumption and debt served as a bridge to the future. That future has now arrived, and it contains fewer shoulders to carry the load.

A smaller working population creates a simple arithmetic problem. Growth becomes harder to produce, debt becomes harder to service, and the temptation to use inflation as a release valve becomes stronger. The incentives to manage markets rather than allow them to “clear” become unavoidable.

The result is a world where the range of possible outcomes widens. Some paths lead to deflation driven by aging populations and shrinking demand, while others lead to inflation driven by fiscal pressure and political necessity. Investors must be prepared for both, because the average of these paths is meaningless. What matters are the extremes.

Resilience is the one quality that helps across all futures. It allows an investor to hold assets that benefit from inflation while also holding assets that protect against deflation, and it allows a portfolio to respond rather than react. It keeps optionality alive.

Where Convexity Still Lives

Despite all the talk about diversification, real diversifiers are scarce. Yet some remain hiding in plain sight.

Volatility in currencies behaves differently from volatility in equities. Interest rate optionality reacts to forces that do not drive stock prices. Gold has shown an ability to reflect monetary stress and geopolitical tension. Certain forms of digital assets have gained traction, not necessarily because of their technology, but because of their portability and their appeal to the next generation of wealth holders.

These assets share something important. They are not tied to the same economic assumptions that bind most of the global portfolio and they do not depend on the same borrowers, the same balance sheets or the same policy choices. They are imperfect, but they are different. On a planet with growing correlation and mounting macro tension, “different” is valuable.

A portfolio that includes real brakes pairs these diversifiers with intelligent growth assets. It seeks convexity on both sides: protection that expands during stress and participation that expands during opportunity. That combination is what turns resilience into compounding.

The Race Is Long

Many investors think in single laps. The headlines scream short term. Many investors optimize for the next quarter or the next year, but the real challenge is the forty lap race. The conditions will change many times and the track will shift. The crowd will cheer and then go silent. There will be stretches of calm and stretches of chaos.

The investor who wins is not necessarily the one who guesses the most corners correctly. It’s the one who builds a car that can handle all of them. Good brakes create courage. Courage creates exploration. Exploration creates compounding, and compounding, over time, creates everything else.

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This is based on an episode of Top Traders Unplugged, a bi-weekly podcast with the most interesting and experienced investors, economists, traders and thought leaders in the world. Sign up for our Newsletteror subscribe on your preferred podcast platformso that you don't miss out on future episodes.