The Rules We Choose to Break

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It was early afternoon on 10th May 1996. Rob Hall was leading a group of climbers toward the summit of Mt. Everest.

Hall had climbed Everest several times and built a successful business taking paying clients to the summit. He was considered among the most experienced guides on the mountain. 

He also had a rule.

At two o’clock in the afternoon, anybody who wasn’t “within spitting distance of the summit” had to turn around and begin descending.

The rule existed for a good reason. At nearly 29,000 feet, climbers were well into what mountaineers call the Death Zone, where the lack of oxygen can quickly impair judgment and physical strength. Every additional hour at that altitude increases the risks, especially when climbers are already exhausted.

Reaching the summit was only half the journey for Hall and his fellow climbers. They still had to get down.

That afternoon, however, he made an exception to his 2 PM rule.

He did it for one of his clients, Doug Hansen, who was struggling toward the summit. Hansen had attempted Everest the previous year but had been turned back just short of the top. On his second attempt, Hall wanted him to succeed.

Hansen finally reached the summit at around four o’clock, roughly two hours past the designated turnaround time.

But the descent became a disaster. A violent storm swept across the mountain. Neither man returned alive.

Eight climbers died on Everest during that disastrous expedition.

One person who survived was Jon Krakauer, and he later described these events in his book Into Thin Air.

I’ve loved reading mountaineering books ever since I first read Ed Viesturs’ No Shortcuts to the Top. And one of Viesturs’ quotes that I have remembered since then is:

Getting to the top is optional, getting back down is mandatory. A lot of people forget about that.

Ever since I read Jon Krakauer’s book, I’ve wondered about Hall’s decision. He knew the risks and had established the turnaround rule himself. Yet he chose to make an exception.

We know the terrible outcome, which makes it easy to judge the decision. But what if the weather had held and Hall and Hansen had returned safely? Would the same decision have been remembered as an example of courage and experienced judgment?

And would that have made it a better decision?

This is something I find difficult about rules. We create them because experience has taught us their value. But life occasionally presents situations in which we feel justified in making an exception. Sometimes those exceptions work out. Sometimes they don’t.

And once we know what happened, our judgment of the original decision can change.

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I was reminded of this while rereading the postscript to Benjamin Graham’s The Intelligent Investor.

Graham tells the story of two investment managers who spent much of their professional lives handling other people’s money.

They were cautious in their approach and avoided expensive stocks. They were also often quick to sell investments once their valuations became unattractive. Their portfolio was widely diversified, usually containing more than a hundred different holdings.

Over the years, this approach worked remarkably well. They earned average annual returns of around 20%, and their clients were pleased.

Then, in 1948, they came across an unusual opportunity.

They were offered the chance to purchase half of a growing business in an industry that Wall Street didn’t particularly like. 

Several leading investment firms had already rejected the deal. But the two managers liked what they saw. The business had promising prospects, and its price was reasonable in relation to its earnings and assets.

They decided to invest US$ 712,500, committing roughly 25% of their fund’s capital to a single company. For two men who had built their careers around diversification, this was an extraordinary decision.

The company prospered, and its shares began rising. Eventually, the stock became too expensive to qualify as an attractive investment under the managers’ usual valuation standards.

Ordinarily, they would have sold. But this time, they continued holding.

By 1972, the original investment had grown in value to more than US$ 400 million. 

The profits from this single investment exceeded those from all their other investments combined.

Who were these two managers? Benjamin Graham himself and his longtime partner, Jerome Newman.

The company was GEICO, the American automobile insurer that would later become an important part of Warren Buffett’s Berkshire Hathaway.

Graham, who had spent decades teaching investors the importance of discipline, diversification, and buying securities at reasonable valuations, had made his greatest investment by breaking some of his own rules.

He could have presented GEICO as proof of his exceptional judgment. Instead, he asked a question that I think every investor should spend some time considering:

One lucky break, or one supremely shrewd decision—can we tell them apart?

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Think about your own investing experience.

You buy a stock after months of research. And you buy it with a margin of safety. Three years later, the stock has gone nowhere.

Meanwhile, a friend buys a fashionable company after watching a YouTube video. He knows little about the business, but the stock triples in eighteen months.

Who made the better investment decision?

The answer seems obvious when we look at the returns. Your friend made three times his money while you earned nothing.

But those returns tell us very little about the quality of the decisions themselves.

Your friend’s investment may have been a fortunate speculation. Yours may have been a sensible decision that encountered an unfavourable outcome. Of course, it’s also possible that your research was flawed and your friend recognised something you missed.

We cannot settle the question simply by looking at the stock prices. But that is what we often do.

When an investor makes a concentrated bet that succeeds, we admire their conviction. But when someone else makes a similar bet and loses heavily, we wonder how they could have been so reckless.

In other words, a successful decision becomes evidence of foresight, and mistakes are often forgotten or explained away. 

This creates a problem for anyone trying to learn from success. We see what worked, but we have much less information about all the similar decisions that failed.

And the problem becomes worse when we start judging our own abilities. A few successful investments can convince us that we understand businesses and investing better than we actually do.

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There is another side to Graham’s GEICO story.

He certainly made an exception to his usual approach, particularly in the amount of capital he committed to one business. Yet the investment was the result of careful analysis.

GEICO had a business model that Graham and Newman found attractive. By selling automobile insurance directly to customers, it avoided much of the expense associated with traditional insurance agents. They also bought their stake at a price that was reasonable relative to the company’s earnings and assets.

Graham understood what he was buying. But he also knew he was taking a risk by concentrating so much capital in one business. The difficulty is that nearly every investor who concentrates heavily in a stock believes he has found something exceptional.

I think this is where many investors misread stories like GEICO.

They see the extraordinary return and the willingness to concentrate. They are less interested in the decades of experience, the depth of analysis, or the circumstances that made the original decision possible.

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There is a small detail about Graham’s GEICO investment that makes the story even more revealing. The deal nearly fell apart because Graham and Newman insisted that the purchase price be fully covered by the company’s assets. The disagreement came down to around $50,000 in accounting items.

Graham himself acknowledged the role of luck in the deal going through. Had the negotiations failed, the investment that eventually grew to be worth hundreds of millions of dollars would never have happened.

This is what makes the relationship between skill and luck so difficult to untangle.

Graham made another observation in the same postscript that I find worth remembering:

But behind the luck, or the crucial decision, there must usually exist a background of preparation and disciplined capacity.

Graham’s years of experience helped him recognise the opportunity. But he could never have known how extraordinarily well it would turn out.

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Now comes the important question: When should we break our own rules, and how do we know when an exception makes sense?

I wish I had an easy answer.

Just to share a personal example, I bought shares of a consumer company at around ₹150 in June 2014. The stock was trading at about 34 times earnings (P/E), higher than I was usually comfortable paying. My estimate of its fair value was closer to ₹120.

I liked the business, its management, and the opportunities ahead, so I convinced myself that paying a little extra was justified. Two years later, the stock was trading above ₹300 (P/E of 36x), and I bought more. And then more in 2022. 

I still own the stock, and it’s around ₹1500. Of course, I am pleased with the ‘outcome’. But I sometimes wonder how I would have judged that same decision had the stock fallen to ₹100 after my first purchase and stayed there for years.

Would I still have considered it a sensible exception to my valuation discipline? Or had a favourable outcome simply made my original decision look wiser than it was?

I think rules exist because we have learned, often painfully, what can go wrong (even when exceptions exist) when we ignore them. But no rule can account for every situation.

Before we make an exception, we should at least understand why the rule exists and what makes the present situation different. And if we turn out to be wrong, can we live with the consequences?

Toward the end of Into Thin Air, Krakauer writes this about the Everest tragedy:

Four of my teammates died not so much because Rob Hall’s systems were faulty — indeed, nobody’s were better — but because on Everest it is the nature of systems to break down with a vengeance.

I’ve often thought about how this applies to investing.

You can build a disciplined investment process, which can improve your chances of making sensible decisions.

But markets, being the complex systems that they are, can still surprise us. Businesses can fail in ways we never anticipated. And a process that has served us well for decades can encounter circumstances it was never designed to handle (think COVID-19 pandemic).

The trouble begins when years of success convince us that our system has accounted for every possibility.

Rob Hall had spent years guiding climbers safely up and down Everest. Graham had spent decades studying businesses and managing money. Both understood the importance of rules, and both had reasons for making an exception.

We know what happened afterwards. Hall’s decision ended in tragedy. Graham’s became one of the most successful investments in history.

But I wonder how differently we would judge their decisions had the outcomes been reversed.

I also wonder whether we examine our reasons carefully enough before making exceptions to our own rules, while we still don’t know how things will turn out.

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Two Books. One Purpose. A Better Life.

• Click here to buy The Long Game
• Click here to buy Sketchbook
• Click here to buy the combo (The Long Game + Sketchbook)

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References and Further Reading

1. Benjamin Graham, The Intelligent Investor — Postscript — The original account of Graham and Newman’s GEICO investment, and Graham’s reflections on skill, luck, and disciplined investing.
2. Jon Krakauer, Into Thin Air — Krakauer’s firsthand account of the 1996 Everest disaster, including Rob Hall’s expedition and the limits of even carefully designed safety systems.
3. Ed Viesturs and David Roberts, No Shortcuts to the Top — A mountaineer’s thoughts on risk, preparation, discipline, and knowing when to turn back.
4. Annie Duke, Thinking in Bets — On separating the quality of a decision from its outcome, and learning to make better choices under uncertainty.
5. Michael Mauboussin, The Success Equation — An examination of how skill and luck combine to shape success, and why distinguishing between them is so difficult.