One of the main ideas associated with German philosopher Friedrich Nietzsche was the notion of the “eternal recurrence of the same”. The idea being that over an infinite period of time, everything recurs infinitely.

He relates this to the notion of Amor Fati, often translated as “love of one’s fate”, and associated with Marcus Aurelius and Stoic philosophy (though Aurelius never used the phrase as he wrote in Greek, not Latin).

In “Why I Am So Clever” Ecce Homo, section 10, Nietzsche writes:

“My formula for greatness in a human being is amor fati: that one wants nothing to be different, not forward, not backward, not in all eternity. Not merely bear what is necessary, still less conceal it—all idealism is mendacity in the face of what is necessary—but love it.”

One reading of this philosophy is decidedly stoic: that we should love and embrace the flow of events, accepting what happens.

This reading alone has always been harder for me to get my head around considering the rest of Nietzsche’s work which focuses largely on his concept of Wille Zur Macht, or Will to Power, the defiant attitude of individual vitality over obstacles and challenges.

The idea that I think reconciles these two seemingly contradictory philosophies was introduced to me by a handmade pillow my grandmother had on her bed (as much wisdom is…). She had stitched onto it the Serenity Prayer:

God, grant me the serenity to accept the things I cannot change, courage to change the things I can, and wisdom to know the difference.

For me, this reconciles the dual philosophy of Amor Fati (accepting the things I cannot change) and Will to Power (Courage to change the things I can).

It also is embodied in the concept du jour of this newsletter: ergodicity. I’ve written previously about ergodicity and why its such an important concept for investors and entrepreneurs, but for the purposes of this argument, we only need to understand that ergodicity means that the time average of a system equals its expectation value or ensemble average.

A pretty simple way to identify an ergodic situation is to ask do I get the same result if I:

  1. Look at one individual’s trajectory across time.
  2. Look at a bunch of individuals’ trajectories at a single point in time.

If yes: ergodic

If not: non-ergodic

For example, If you survey 6 people who played Russian Roulette for a $1 million dollar prize, on average, five of them will be very happy because they won a million bucks. One will not respond.

Using an ensemble average of the six people suggests that Russian Roulette is a very nice game where you win lots of money and so it would be wise to play.

Common sense suggests otherwise. If you, as a single individual, were to play Russian Roulette over and over, you would not be very happy with the long term outcome.

Russian Roulette is non-ergodic: one person playing 6 times (time average) gets a very different result than 6 people playing one time (ensemble average/expectation value).

The rest of our lives are non-ergodic as well. The main insight that understanding ergodicity brings is that we don’t get to live an infinite number of lives where we can do things differently each time. We live only one life through time and we have to live with our choices forever.

I think this is the same idea Nietzsche was getting at with Amor Fati or the eternal recurrence of the same.

Imagine you were approached by an otherworldly being which declared that you would have to live your life, exactly as you have lived it, including “every pain and joy” over and over again, for eternity?

Nietzche’s eternal recurrence of the same which emphasized the non-ergodic nature of our existence. We live only one life through time. How might this change our behavior? Part of that is accepting what can’t be changed and part of it is the courage to change what can be changed.

Would you put up with a boss that treated you badly for five years knowing that you would have to spend five years with that boss every time you lived your same life over and over for eternity? Probably not.

We tend to rationalize these sorts of situations because they will eventually come to an end, but in Nietzsche’s notion of an eternal recurrence of the same, we are confronted by the fact that they will not, they will recur for all time.

Similarly, if you had some situation beyond your control, would you lament it forever without being able to change it? Nietzsche was frustrated by his parents’ and sisters’ maddening attitudes and prejudices (in particular, their anti-semitism) but it was beyond his power to change them. He finally realized that he had to accept it for what it is.

To apply it to investing, when the time comes to look back at our investing fate, how will we evaluate it?

That’s a fairly easy question: we want to have a respectable long-term compound annual growth rate (CAGR) on our capital (inherent in that is not facing any massive drawdowns or going bust). If you looked back on that path, you’d be pretty happy repeating it over and over, right?

This notion, despite its seeming self-evident truth, flies in the face of how most people are taught to think about investing. Every investor seeks to maximize their expected returns while minimizing their expected risk.

The problem with the expected return is that it is a probability-weighted average of all possible “what if” paths. In the case of playing a game of Russian Roulette for a million dollars, the expected return is $866,666. Five times out of six, you win a million dollars. One time out of six you end up as a fresh coat of paint on the wall next to you.

What matters is not maximizing expected return across many individuals, but that we are robust to every possible path as a single individual. We want to have covered all the bases. I believe what this means for most investors is that they need to be less focused on the return side of things and more to the risk side of things. It is the big losses that really matter to compounding and risk of ruin.

Most investors are not properly diversified. They have many assets in their portfolio but all those assets are implicitly or explicitly short volatility – they all tend to get hit at the same time in a crisis such as 2001, 2008 or March 2020.

Consider that if you lose 50% in one year, it will take a 100% return just to get back to where you started. One big loss impacts your long-term compound annual growth rate in a painful and disproportionate way. It can be very challenging to recover from.

One can also take this fear of risk too far. There is courage at play here too. Hiding away and taking no risk is also very risky. In the long run, being overly defensive is just another way to ruin your fate. The objective is not to avoid risk, but to optimize it.

To be sure, there are no easy answers to these questions in investing or in the rest of life. How defensive is too defensive? How offensive is too offensive? How bad does a boss need to be for how long to warrant quitting a job and taking a risk?

These are difficult and nebulous questions. However, starting from the idea of ergodicity and Nietzsche’s “eternal recurrence of the same” is, in my opinion, the best way to think about.

There’s only one question to ask when you make any decision, investment, or otherwise: If you had to live your same life over and over through all eternity, would you be capable of amor fati, loving your fate?