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What to know: Much like hole-in-ones in golf, low probability events can occur with surprising regularity. With investing, risk isn't just about probability, but the potential severity of loss when things go wrong. Here, author Sandeep Srinivas uses coin-toss scenarios to demonstrate that two games with the same expected return can differ dramatically in risk based on loss severity.

Above all, the prudent investor focuses on minimizing the severity of failure, not just maximizing potential returns. Empirical data reinforces this approach. Over the course of a decade, companies with low leverage (debt-to-equity below 30%) outperformed high-leverage counterparts and broader indices, demonstrating that strong balance sheets enable resilience and long-term compounding of returns.

Key takeaways: Your investment success depends on safeguarding capital from permanent loss, which involves strong financial foundations (i.e., a comprehensive framework) and leveraging compounding over time. Managing risk is not merely defensive but essential for sustainable growth.