The First Investment Rule That Most Gurus Fail To Follow
A small mistake that can lose you a lot of money
I have been subscribed to thousands of finance newsletters and publications for more than ten years. The vast majority of them are not aligned with my understanding of finance. But I don’t unsubscribe because it would make me biased to what I want to hear.
It’s impossible to read all of them, and I wouldn’t want to pretend that you do. But I have made it a point to read some of them sporadically and refute what they say.
It is an exercise that often makes you realize that your principles are wrong, or perhaps the opposite, and you reaffirm them. Believe it or not, this constantly happens in social networks, and we only follow accounts or profiles aligned with our way of thinking.
While cleaning up my emails, I found a newsletter that I was a huge fan of because of how it analyzed companies, but day by day, I realize that the risk management it does is entirely wrong.
There is a rule of investing that goes from the most value investor to technical analysis, to quants: “DON’T LOSE MONEY.”
How can it be that you lose 25% of your portfolio in just one week? Honestly, it seems inconceivable to me.
We have all made this kind of mistake. I was the first one. But we must be aware of what it costs to get the money and not throw it away from one day to the next.
We are talking about your children’s college, your mother’s hip operation, or going with your wife to travel around the world, and sincerely that is not something to play with.
It is clear that if you make a very risky bet (for example, all your money on a microcap) and you do well, you will look like Warren Buffett. But there are much more optimal ways to manage your capital and allow you to sleep peacefully and, why not, earn a lot of money.
Many managers know this and do it perfectly. One of them is Spitznagel. They have a portfolio with a massive % of assets with minimal risk (very short-term bonds, gold, silver, different currencies, etc.) and a tiny and very uncorrelated part in risky investments.
This philosophy is very similar to the one we propose at Asymmetric Finance, keeping the differences in mind. A few weeks ago, we shared an exciting chart on how our portfolio behaves with our subscribers.
As you can see, our portfolio remains flat, even joyous, practically 99% of the time, but is exposed to positive black swans very occasionally.
There was one day when we had a return of 13%.
Of course, this gives us a lot of peace of mind to rest easy and grow our capital with totally organic growth in the long term.
It is not easy to implement, nor is it easy to follow psychologically, but the results can be life-changing.