What the LA Fires Can Teach You About Investing

2025 is off to a wild start...

Before we get started, I wanted to thank everyone who listened to my podcast last week on Spotify and Apple Podcasts.

We don’t have a new podcast this week as I had to evacuate Los Angeles due to the fires. But if you missed last week’s episode titled “My #1 Prediction for 2025” you can listen to it here on Spotify and Apple Podcasts.

In last week’s newsletter, I revealed my top three predictions for 2025.

I also included this caveat:

“I kind of hate [making predictions] as there are so many events that are unpredictable. For instance, not a single person in January 2020 expected the global economy to shut down due to COVID-19. And it was the same in January 2022 when nobody expected Russia to invade Ukraine.”

Now we can add another event to this list: the Los Angeles fires. I have lived in Los Angeles for five years and purchased a house in the city in the spring of 2023.

And my house - which I’ve put so much love and care into with my fiancé over the last few years - nearly burned down on Tuesday evening (and still may burn down).

We will not get into the politics of this issue in this newsletter, although I did cover that in a video posted to my Instagram and TikTok accounts yesterday.

Instead, we’re going to use this as an example about what “risk” actually means.

The Problem with Predictions

We knew coming into 2025 that the biggest risk this year would be something nobody was talking about.

While we’re less than two weeks into 2025, not a single forecaster said the largest natural disaster in US history would occur this year. Yet here we are, as some estimates show the fires in California will cost $150 billion, nearly rivaling the $193 billion in damage from Hurricane Katrina.

But this is the nature of risk. It is unknowable.

The 1,000 members of our investing community often ask what the “biggest risk” in the market is.

Even asking this question misunderstands the nature of risk. As Morgan Housel wrote in his 2023 book, “Same as Ever,” asking what the biggest risks are is like asking what you expect to be surprised about.

If you knew what the biggest risk of 2025 would be, you’d take action to mitigate that outcome.

But again, the biggest risks are impossible to forecast.

You Must Understand Risk

At its core, risk is all about what you can’t imagine.

Nobody expected COVID-19 to shut down the global economy in January 2020, just like nobody expected the largest natural disaster and US history to happen last week.

And this has always been the case. During the onset of the Great Depression in 1930, nobody was concerned about unemployment. In fact, when the National Economic League polled what respondents thought was the biggest problem in the US that year, unemployment was ranked 18th on the list.

And two years later - two years into the Great Depression - it was still only 4th on that list behind prohibition, administration of justice, and law enforcement.

The hard truth is risk is about what you don’t see coming.

And as an investor, you need to understand this.

Investing in Preparedness (Not Prediction)

Risk is all about what is impossible to plan for.

And the Los Angeles Fires are a great example of this in action.

Don’t get me wrong, there were plenty of missteps that made this worse than it needed to be. That includes Mayor Karen Bass cutting the fire department budget despite a 50% increase in calls since 2010, the poorly timed repair of the Palisades reservoir that caused critical water pressure issues as the city burned, and decades of neglect when it comes to forest thinning and controlled burns. All of this left the second largest city in the US vulnerable to wildfires.

But what they could not prepare for was the combination of wildfire - some of which was arson - combined with category 2 hurricane-level winds of 100 miles per hour happening at the same time.

While more funding and water may have helped, the fire in Pacific Palisades was a true black swan event. Firefighters cannot adequately fight fires in 100 mile per hour winds, let alone use helicopters and planes to drop water.

Despite the state spending $2.2 billion on forest management, $1.2 billion on the Los Angeles Fire Department, and $3.7 billion on the California Department of Forestry and Fire Protection (CalFire) last year, we still had the worst fires in state history.

Even with billions spent on forest management and firefighting resources, California still faced its worst fires in history. This highlights a critical lesson: no amount of preparation can eliminate all risk—whether in disaster management or investing.

Again, risk is what you can’t and don’t see coming. And that fact applies to your investing approach.

Prepare for the Worst, Hope for the Best

In the world of investing, as in life, the biggest risks are often the ones you can’t imagine. The Great Depression, 9/11, COVID-19, and now the Los Angeles fires all fall into this category.

That’s why Nassim Taleb’s mantra, “invest in preparedness, not in prediction,” is so powerful. Instead of trying to forecast the unpredictable, focus on building a resilient portfolio that can weather the unexpected—be it a financial crisis, a geopolitical conflict, or a black swan event like the Los Angeles fires.

Firefighters prepare for the unexpected with rigorous training, diverse strategies, and the right tools, knowing they can’t control nature but can respond effectively. Similarly, investors must build portfolios that can weather unpredictable market events by diversifying, managing risk, and staying focused on long-term goals.

Because while we can’t predict the future, we can control how we respond to it.

Stay safe out there,

Robert

If you’d like to support those who lost their home and the first responders, please consider donating to World Central Kitchen which provides meals to people displaced by the fires and those actively fighting the flames.