Margin of Safety (Early Wittgenstein, Part I)

In investment discourse, we are used to juggling objects: assets, prices, profitability, risk... We think of them as independent things. Pay attention to this - keep in mind: the more the resource you subscribe to broadcasts the clarity of the number, the more it tries to shit and confuse our brains. And this is clearly not without reason. Sorry, but behind the apparent obviousness there is usually hidden a complex motivation. Someone is trying very hard. Not for free.

In the Tractatus Logico-Philosophicus, the early Wittgenstein offers us a different perspective: things are the elementary components of the world. But by themselves, they carry no meaning.
Meaning arises when things enter into relations with one another, forming what he calls facts.

"The world is the totality of facts, not of things" (1.1).
A fact is a state of affairs (Sachverhalt), a logically possible combination of objects within a specific structure.

And this is exactly how investments work. Money, assets, prices, volatility, returns — these are not facts, but things. They begin to carry meaning only when they enter into relations with one another — and with a specific person, with all aspects of their life.

The way we handle money is our individual form of self-expression in our relationship with the world.
An investor is not an external observer. They are the context. They are the state of affairs. They are a person acting from within their form of life — with their own structure of identities, values, priorities, life circumstances, financial goals...

If a strategy does not take into account who the person is, it becomes logically incomplete — a model based on indicators but not embedded in life — and it loses its ability to function as a true instrument. It becomes like a statement made up of words, but devoid of meaning.

When the market is rising — when charts climb upward and to the right — a portfolio consisting of 100% stocks may seem not only logical, but the only correct choice.
But good times are not eternal. And right now, with markets being volatile, it becomes especially clear: investing is not about maximizing returns; it is about achieving goals.

A portfolio of 100% stocks is a lifeless model. Without the investor. Without the context.
A good lesson for beginners.

Reality lies in the facts.
We must be prepared for unforeseen events: illness, injury, accidents, loss of income — all these are part of life. And for such cases, we need safe, liquid assets.

If your entire capital is invested only in stocks, you risk finding yourself in a situation where you have to sell at a loss — not according to strategy, but out of necessity.
If this year you need to pay for your children's education, support your parents, or cover medical expenses, a portfolio composed entirely of stocks may not solve your problems — it may become yet another problem.
Because you were not investing toward your goals. You were investing toward hypothetical returns.

And as we know, the market teaches the careless — not the cautious.

Here, a fundamental failure reveals itself: the strategy worked with things (prices, percentages), but not with the state of affairs — with our life itself.
This is not an investment error.
It is a logical error.

Since 2009, the growth of the American market has delivered outstanding results — by the time of Trump’s inauguration, the S&P 500 had generated an astonishing 15.3% average annual return.
I don’t want to sound alarmist, but we cannot forget the history of the Japanese market in the 1990s.

In the 1980s, the Nikkei index seemed unsinkable: the market was booming, the economy was thriving, and trust in the future was embedded into the worldview.
But then the market crashed — and did not return to its previous levels for decades.

Nevertheless, portfolios finely tuned to goals, broadly diversified, and regularly rebalanced demonstrate resilient behavior.
Through the systematic return of allocations to their target distributions, they automatically reduce the excessive influence of individual markets, preserve balance — and reliably solve the life tasks of investors.

But even this is not all.
When a strategy includes liquidity — cash, bonds — these are not just technical elements; they are how we build a margin of safety.

They are mechanisms for embedding logical flexibility: the ability to adapt without losing structure.
It is an acknowledgment that things can change, and facts may arrange themselves differently.

The margin of safety is an expression of the logical completeness of a strategy.
It is not about caution or a "strategy for the weak." It is a way to make the model viable within the context of an individual investor’s life.
It is mature work with the logical space, where a portfolio becomes not just a collection of assets, but a totality of facts, integrated into the structure of life.

Yet the world does not always behave logically.
Even if we have structure, goals, and a margin of safety — we still live in a world where each new variable can shift the previous state of affairs.

Early Wittgenstein gave us a logical lens.
In the next part, through late Wittgenstein, we will explore non-ergodicity, the survivor bias, and the market as a language game.
And why analytical philosophy teaches not how to beat the market — but how not to deceive ourselves with words.

Manage your life and your personal finances wisely.
Knowledge is power!