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Part 1 of this article appears here.

Path dependency is a very important concept. It’s something we constantly think about, and thus, we’ll take a small detour to explore it.

In addition to our traditional quality analysis, which falls into three buckets (business, balance sheet, and management), we also look at companies through the slightly different lens of fragility.

We owe our gratitude for this concept to one of our favorite thinkers, Nassim Taleb. Nassim wrote Fooled by Randomness and Antifragility, among other books. In Antifragility, he says that the concept of fragility is actually comprised of three concepts: fragility, robustness, and antifragility.

We all know what fragile is – something easily breaks from stress. Glass is fragile, which is why when you ship it, you gently wrap it up in a lot of bubble wrap, put it in a box, and write “FRAGILE!” on it. Then you pray to the shipping gods that every person it meets along the way is a gentle soul, who handles it with care so it doesn’t arrive in bits and pieces. Fragile things require a lot of care and prayer.

Then you have robust things. Beat them up, throw them around – they don’t care. They still come out okay in the end, as if they were made out of good rubber. No fussing or praying required.

And finally, we have antifragile things. They are just like robust things, except that they actually benefit from all of the abuse heaped upon them, gaining strength from it. With antifragile things, you pray for abuse and disorder. We think of them as robust (rubbery) things that have the ability to not only adjust to blows, but learn and grow from them.