A friend asked me if I had any rules for investing, not necessarily in stocks but in other things, and I said that I didn’t have hard and fast rules, but thought about it more in terms of principles. What are those principles, she asked? Well… I didn’t quite have an answer ready.
I’ve thought more about it and decided to put it all in one place publicly.
First, I divide investments into “risk” and “no risk” categories. You could argue that everything has some risk, but I consider the no-risk investments to be things where, in my estimation, there is less than a 2% chance of loss. This is arbitrary and subjective, but for my investments there’s a pretty clear cut line.
Investments that fall into this category would be CDs, fixed rate return stuff like BlockFi USDC coins, and investing in a friend’s real estate development where he pays me a fixed return.
In the “no risk” category, I keep enough money to have a really long runway. I don’t have a fixed amount of time, but it would be measured in years thanks to my very low cost of living. Basically the way I think about it is, “If all of my at-risk money was lost and this is all I had left, could I survive and keep my life going with no big negative changes?”.
I divide these investments between different things mainly for liquidity, diversifying that small 2% risk, and for timing. Both Blockfi and my friend’s real estate thing return around 8%. I trust my friend 100%, but when he borrows my money it’s for a fixed term, so I keep some in other things for liquidity.
On the risky side my goal is to cumulatively “level up”. If I’m taking any risk at all, the return must be better than 8%, or I’d just invest it in the no-risk things. I also must know why I am investing in it and understand why the upside exists.
For example, I have some money in crypto because I believe that it will become an increasingly important part of our society’s future, and if that happens the rising tide will bring good returns. I also recognize that I could be totally wrong on this, which is where the risk comes in. As crypto markets become increasingly popular and accessible I think that my argument for buying crypto is weaker. However, I think about it similarly to how I think about my general balanced stock portfolio — I’m not trying to pick out winners in crypto, I’m just trying to go along for the ride up.
I’m also investing in a friends’ business. Like any small business it could go to zero, but I know enough about them and their business to feel comfortable that the potential rewards outweigh the potential risks.
I have a few other things in this category, but they follow the same pattern. Some clear risk, disproportionate potential rewards.
Because these are the only factors in my decisions, I don’t change course when other things change. For example, when crypto crashed I actually bought more because the potential reward felt the same to me, but the risk was lower (since I had to risk less money for that reward). I have actually been surprised to see how many smart people instinctively want to buy things when they are up and sell them when they are down, as my instincts are the exact opposite.
Likewise, when everyone was scrambling to buy ICO coins (or, recently, do “yield farming” with crypto defi), I skipped out on it because I couldn’t understand where the long term gains were going to come from. I think my background in gambling has made me keenly aware of things that are gambling masquerading as investing. When some people make big money in those things, I don’t feel like I’ve missed out, I just feel like they got lucky. Same with when people buy individual stocks and win big.
When things seem too good to be true I don’t dismiss them immediately, but I also don’t invest until I have a very solid reason on why they are so good. For example, six months ago a friend brought a stock idea to me that mathematically seemed too good to be true. I did the math over and over again on it, researched comparable situations, and consulted with a friend who is a licensed stockbroker and trades professionally. It seemed inescapable that it was very likely to return 300% and there was a small (I estimate it at 20% or less) chance it could go to zero. It is unlikely to land anywhere between those extremes, which makes it easier to calculate. Feel free to ask me in January 2021, when it is over, if it worked or not and I’ll write up a full debrief.
(By the way, if someone else wrote that paragraph I would be 99% sure they were wrong, so I don’t blame you if you feel the same way. For that reason I thought about not mentioning it, but it serves as a good example)
There is technically a third category, which is the stock portfolio that I mentioned in my “manage money like a billionaire” posts. I think of it more as a tool to manage money than to invest money, but it is actually a hybrid of both. It is a way to gain liquidity, efficiency, add a small long term gain, and to hedge against things like inflation. The price I pay for those benefits is the addition of a small amount of volatility.
I never regret well-reasoned decisions and I never feel like I am missing out because someone else made more money than I did. I know what my financial goals are, and I know that they may be different than those of others. I trust my decision making process, and can distinguish the difference between luck and skill.
A good analogy is a poker game. If someone made a huge amount of money at a poker game, it is very unlikely to be a professional. Only a poor player will gamble on enough hands to get crazy lucky and make a disproportionate return. Professionals can have big wins, but most of their profit comes from small calculated advantages. Does that mean their decisions to play those crazy hands was correct? Of course not. Sometimes great outcomes come from poor decisions and vice versa.
Like life in general, know what your goals are, design a system to achieve those goals, improve incrementally, trust your decisions, and be happy with the results.
Photo is me driving my Lambo because I’m so rich from investing in penny stocks and ICOs. Buy my guide to become a millionaire in one week or less!
…actually one of the Superhuman 4 attendees rented the car so that everyone could experience what it’s like to drive a Lamborghini. Pretty cool! We all agreed that driving that car for 15 minutes is the ideal amount of time to drive it.