MWB #20 - Timeless Investing Principles
...learn to navigate the world of investing better
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Hello friends,
What a week it’s been since you last heard from me.
Well, that goes especially for those who have been investing either in stocks or crypto.
Our beloved Bitcoin fell by more than 50% and stocks are yet to give up on their downward trend.
I know some of you suffered loss and at some point didn’t even know the best action to take. I’m so sorry. Whatever action you took, I trust you will take it as a learning point notwithstanding the outcome; good or bad.
Today, I will share with you some of the timeless and counterintuitive investing principles that will help you navigate the world of investing better.
1. The higher the potential return, the lower the % of your capital you should allocate
If an asset has the potential of giving you 100% in a year, then you should allocate a smaller percentage of your capital. The reason is simple; if it can grow 100% in a year, it also means it can fall 50% or more at any given time.
2. Risk always looks impossible until it happens
When you learn about investing, there is a high likelihood that you would have also learned something about risk management. Things like #1 point above, diversification, not investing short-term funds in a long-term asset, and so on. However, many times, the worst-case scenario almost always looks impossible until they happen. In fact, the way it works is that the more people believe the worst-case to impossible, the higher the probability of it happening soon.
Therefore, take your risk management seriously and don’t assume something to be impossible in the world of investing. You are better off preparing for it and it did not happen than to assume it can’t happen and it eventually happens.
3. Don’t attach your identity to any investment. Your goal is to make money, focus on that.
When something is making us or money, we so quick to tie our identity to it. It’s the reason why when asked questions like “can I meet you”, the first thing that comes to our mind will be our work; we make a living from it. We are susceptible to carrying on this natural tendency to the world of investing. However, if you can overcome it, it will be good for you.
You are you, and you are allowed to change your mind. The problem with attaching something to your identity is that it then becomes difficult to change. Changing it will mean changing something fundamental to your being; like changing your religion. However, your investment shouldn’t take that kind of position in your life.
Your goal is to make money, focus on that alone. If it is making you money, good, if it’s not, don’t be afraid to upgrade your knowledge.
4. Don’t get your investment advice solely on social media
Social media is a good place to start your research. It’s been a good point A for me as well. However, if you feed only on social media commentary to determine your investment direction, your money will soon be passed on to those who have better use of it. Because it appears you don’t need it.
People come on social media to say a lot of things about this or that investment. What you don’t know about the circumstances for them though is a lot. That asset may only be representing 1% of their net worth or less or more. Forget about the absolute figure. They may put $10,000 and it is not up to 1% of their popcorn money. But your life saving isn’t even up to that, yet you want to play the same game with them? Please don’t.
Get enough education and let that guide you or get expert advice and better still, give your money to a wealth manager.
5. Your goal is to have a great sleep at night and not make the maximum return
A lot of you won’t believe this, but it’s the truth. Your goal is to invest in such a way that your peace of mind is not taken away.
Sometimes, that will mean leaving a lot of gains on the table and sometimes it will mean getting the maximum gain on the table. However, optimizing solely for the maximum gain will deprive you of great sleep and peace of mind.
I trust you have picked a thing or two from this week’s letter.
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Thank you,
Until next week.