Failure

I’ve been playing guitar for the last two and a half years. Trying to learn anything at any age past 25 just feels like torture. You try doing something - sometimes over and over - but keep on failing. It’s incredibly frustrating. You look at what the tutorial tells you to do. But you try it and fail. Miserably. But here’s the most counter-intuitive thing I’ve come across in the last five years: Failure - especially repeated failure - enables you to learn a lot faster. You will keep on picking the wrong strings, over and over, until eventually you pick the right one. And that dopamine hit fuels you as you try and hit the next note correctly. Eventually, you learn. But you have to build in enough time for repeated trials and errors that get you from hitting the wrong strings to hitting the right ones. I’ll repeat that. You have to build in enough time to go from hitting the wrong strings to hitting the right ones. Luckily, at our age, we have the luxury of making mistakes. That’s because we have plenty of time to recover from failures, provided they are not catastrophic.

Don’t Impale Yourself

The last line of the above paragraph is extremely important. You can make mistakes, so long as they don’t permanently impale you. For this, you need to have a pretty protected environment that allows you to experiment safely. It should allow for some level of damage control in case things go south. The key here is to have what investors call a Stop Loss. This is a mechanism that ensure your losses are capped to a specific amount, after which it gets you out of the trade completely. This mechanism looks very different from person to person, environment to environment. Since this is an investor's blog, I’ll let you in on the mechanisms for making mistakes that I’m building into my portfolio.

Buy The Basket

About 50% of my portfolio is purely in index funds (I’m increasing this proportion with time). Plain old boring index funds. I do this because index funds are probably the most diversified instruments in the stock market, especially total market index funds. One of the major mistakes I made when I started investing was going tech heavy. This meant that when one stock in my portfolio went down, all of the rest followed. A piece of bad news on one stock in the advertising space. Well all the rest followed as most tech stocks have an advertising component to their businesses. Index funds also help to ensure no one stock hits your portfolio too much on the low side. The disadvantage to this is that its the same effect on the upside.

In the Intelligent Investor, Benjamin Graham says that most people are passive investors, and should ensure more than 80%-90% of their money is in index funds. This is because the normal person doesn’t have the time to sift through company data to select the most promising stock. Its a full time job. And besides, passive investing in index funds, over a period of over ten years, outperforms active investing. This leaves room to experiment with stock picking, which is a risky game with large potential losses. But they will always be buffered by the index funds.

Stuff Here, Stuff There, Stuff Everywhere

One thing I’ve realized is that we, as people, will always want things. So long as there is the concept of ‘better’, we will always go for it. Its a hard impulse to ignore. And I’m banking on it. We complain about climate change, but won’t stop buying stuff - stuff we usually don’t need. We can say something’s addictive, but still continue using it. People will always want stuff, and thus there will always be companies that make the stuff people want. I’m therefore invested in companies that provide products that have become essential in our daily lives. So long as we have some social pressure to have a phone, clothes, to listen to music and shows, I will always have some money invested in these companies. These companies will mostly have long lives, and will continue to exist at some price, even if lower that the prices enjoyed before. AT&T has been around for more than 100 years. Ford too. IBM too. And a 100 other companies. Many of those that aren’t around were acquired. The rest vanished. My hope is that I’m picking up the IBMs and the AT&T of this generation.

Hurt Me, And I’ll Hurt You

Someone asked me why I wasn’t worried that all my money would disappear. I had to stop and think about it a little. Then I realized that for this to happen, the entire US stock market would need collapse. If that were to happen, then most other international stock market would collapse too. And the effects would trickle down to other asset classes such as property, and commodities. That would mean a great deal of wealth would be wiped out from the population. Trillions in fact. If this were to happen, it would mean the end of civilization as we know it. The end of capitalism. And I, an investor, wouldn’t be the only one in pain. While I’m not proud of this, I know for a fact that governments would probably try to bail us out. Because of that fact, I’m a little at ease. Besides, the US is the single largest economy in the world, with the largest commercial banks in the world, and with the world’s reserve currency. If they fail, we’re all in trouble.

Cash Is King

I only invest a proportion of my income on a monthly basis. This means I always have a cash buffer that I can deploy when the opportunity arises. Even if the stock market goes up in flames, I still have some money to get me through. This has a major advantage in that it has allowed me, during this bear market, to continue buying. Its like snatching up bargains in the market, left and right. The rule I’ve adopted it to have anywhere between 20% and 40% of your wealth in cash. Bad things happen, which require one to have some cash lying around. A medical emergency, a deal on a property, a treat for yourself and the people you love. Having cash will ensure that you are able to move with speed when any of this happens. And if you’re thinking of reaching out for a loan? The answer is no. It’ll only serve to reduce these advantages. And there’s only about 5 people in my life I’d make this sacrifice for.