Buying businesses that require constant capital reinvestment and earn lower incremental returns can be disastrous in your wealth creation journey.
In Lewis Carroll’s “Through the Looking Glass”, Alice finds that she has to run faster and faster just to stay in place.
“Well, in our country,” said Alice, still panting a little, “you’d generally get to somewhere else if you run very fast for a long time, as we’ve been doing.”
Here’s the advice Red Queen, an antagonist in the story, offers to Alice…
A slow sort of country!” said the Queen. “Now, here, you see, it takes all the running you can do, to keep in the same place. If you want to get somewhere else, you must run at least twice as fast as that!
In sum, the Red Queen advises Alice to exert ever more effort just to maintain her current position.
Evolutionary biologist Leigh Van Valen took inspiration from the Red Queen’s words and proposed a principle called the Red Queen Effect in 1973 to explain how, for an evolutionary system, continuing development is needed just in order to maintain its fitness relative to the systems it is co-evolving with.
In biology, this means that animals and plants don’t just disappear because of bad luck in a static and unchanging environment, like a gambler losing it all to a run of bad luck at the casino.
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