Ubbe, Niranjan and Risk

Amar Pandit , CFA , CFP

In 2021, I watched a couple of seasons of “Vikings” on Netflix. There is a character called “Ubbe” in the show and there is an amazing sequence involving Ubbe and 3 kings.

The 3 kings are Danish warlords and pirates about to attack England. Ubbe who is also a Dane is however the General of the English Army. He tells the King of England “Let me speak to these 3 kings and see if we can avoid this war by making them some offer. The war will not help anyone so it’s best that we speak with them.” The King of England tells him to go ahead.

Ubbe meets these 3 kings and offers them a peaceful solution. He says “Thousands will die on both sides. What is the point of this war? What do you guys really need? Why don’t we offer you land and some gold?” He tries to get them to think about this and makes interesting offers.

2 of the Kings agree but the third one does not. He is adamant on going to war. Then Ubbe challenges the 3rd king to fight for a solo fight if he is, so hell bent on a war. I am shortening the sequence here else I would end up writing several pages just describing the scenes. “If you kill me”, says Ubbe, “you get what you want.” The 3rd King agrees as he is overconfident in his capabilities. He is sure that he will kill Ubbe.

The fight is gruesome, and both are seriously injured, but Ubbe finally manages to kill the 3rd King. Ubbe manages to avoid the war (saving thousands of lives on both sides) and the other 2 kings accept the generous offer given to them.

Now what has this got to do with investing you might wonder.

There is an excellent framework for risk taking that’s embedded in these scenes.

From Ubbe’s perspective, the 3 kings were anyway going to attack and thus his and many more lives were at risk. So, by making that offer to fight the arrogant (and strong) king one to one, he was actually reducing the risk to what he could truly control. Additionally, if he could win this, the payoffs were big. Bloodshed could be avoided, and lives saved if he won. The King of England would win too.

On the other hand, the 3rd king acts like a Fool. He just thinks he will Win. He does not consider the scenario if he loses. He does not think that if loses, he loses his life and everything. Even if he wins, he still has to go to War. Thus, by fighting with Ubbe, he is staking a lot at risk while having nothing to gain besides satisfying his ego.

While this was a case in the Web series, let’s discuss a real-world case with the entry of Niranjan. By the way, Niranjan is in no way related to Ubbe. Niranjan is my car driver and I mention him because of an incident that happened a few months ago. He is a nice guy and drives well. However, one Friday evening, we were headed home, and we had to take a right. There was no signal at the junction and there were vehicles coming from the opposite side.

One Van seemed to be speeding from a distance. I could see the person was not slowing down. Niranjan flashed on the lights to the vehicle and quickly took the right turn. The Van came really close to us and missed us by a whisker. I then asked Niranjan why he did it and why he didn’t wait when he could see the person was not slowing. Niranjan’s response translated into English “I thought he would slow down. I flashed the light so I thought he would stop.

I then told Niranjan “Do you know that person – whether he is drunk, sleeping or inattentive? How could you give our lives in the hands of this unknown person? You drive us. I have placed my trust in you. I don’t know that person and don’t know whether he will react in a certain way. In a few seconds, you placed both of our lives in the hands of this stranger. Did you understand the risk you were taking?”

Niranjan apologized for this and more importantly said he understood this.

Niranjan was sure the van would stop. He had not considered the possibility that the van would not stop.

There are 2 important questions that Ubbe had asked himself (I am guessing this as I have made these 2 questions) but the 3rd King and Niranjan failed to ask themselves.

The most important question is this: “What’s the worst that can happen if I were to do this?

The second important question is “What is the Payoff if I do this?

Using these 2 questions, let’s look at a few situations with respect to investing.

  1. What’s the worst that can happen if I invest in this single stock or the hottest investment?

    What is the Payoff?

    The worst is that you will lose your entire investment and the payoff is that you can become an instant millionaire. I am just making this up to give a context and get the point across. There are infinite possibilities that can happen but it’s key to understand the worst and the payoff.

  2. What’s the worst that can happen if I invest in this diversified portfolio of investments?

    The diversified portfolio could temporarily decline based on the stock market. The worst-case scenario could be a temporary decline of 50-60%.

    What is the Payoff?

    I will be able to beat inflation and maintain my lifestyle.

    Real Multigenerational Wealth creation because of higher post tax and post inflation returns (compounding).

  3. What’s the worst that can happen if I invest in Fixed Deposits or Fixed Income only?

    I will not be able to beat inflation and thus will not be able to maintain my lifestyle.

    What is the Payoff?

    The (false) feeling of security that my money is safe.

    Low Returns Post Tax.

Finally, do this exercise with your portfolio and answer the 2 questions.

What’s the worst that can happen if I invest in the following —————FILL in the BLANKS – (This is YOUR WAY)?

What is the Payoff of doing this?

Are you liking the answers you are getting?