Part 2: Thousands Now Make Good, Reasoned Decisions, Just Like the Most Successful Billionaire Investors:
Many thought they never could, until they trained themselves to stay awake and escape from the herd. By Daniel Frishberg Part 2 - A Strategic View
We live in a time of innovation. The creation of the global middle class is the greatest business ever pursued on this planet, and because of it, the values of relevant assets are rising at an unprecedented pace, as are the number of opportunities to deploy capital. Our mission is to assist our audience and our clients to gain access to these amazing opportunities, and at the same time we will have to manage the risks that accompany this explosion of opportunity.
The following are the risks confronting individual investors over the next decade. We analyze each carefully and our decisions always take them into account:
1. Economic downturn in different places at different times, even while the world continues to progress
2. Rising interest rates
3. Accelerating inflation
4. Investors' willingness to assume risk diminishes and multiples shrink at certain times, sometimes related to events, but often not
5. The dollar is likely to fall in value against other currencies
6. All paper money around the world declines in value against real or hard assets, since countries can print it at will
7. Government policies change and sometimes have a negative impact on companies and industries
8. Managers of companies and countries inevitably make mistakes
9. Short-term events impact value temporarily and sometimes those changes are permanent.
These risks are real and are a permanent part of our world. Individually, they are often called “Black Swan Events,” but as I suggested to Taleb on a panel at Freedom Fest years ago, these events come with such regularity that a time without them would be a Black Swan Event, and taken as a group they are actually a “White Swan Event.”
Our mission is to balance our desire to take advantage of the opportunities, with our need to manage the risks that confront us. From this analysis we develop an individualized core portfolio, then modify it and rebalance it as necessary based on the changing conditions.
A logical and coherent portfolio is not merely a collection of stocks chosen from the most interesting articles or websites, and it is also not just a collection of assets based on the limitations and biases of either the client or the manager.
What makes the perfect investment anyway?
-- We need our investments to grow so we can keep up with inflation and more. The adventurer is attracted to growth, yet emotional craving for excitement is the wrong criterion for selecting investments. On the other hand, growth is required in every portfolio, at the very least, to keep up with rising prices and an eroding dollar. Risk averse investors need it as much as overly risk prone investors. This is why strategic planning is crucial.
-- We also need certainty, because our savings were too hard to come by in the first place. Losses are mathematically difficult to recover. Just do the math. A 50% loss requires a 100% gain to get even. That’s why losing money is much worse than losing opportunity.
-- We also need liquidity, because feeling trapped is too painful and frustrating. Entrepreneurs and businessmen in particular hate to feel they are giving up control. They feel they must keep their options open, and they are right. Change is coming constantly and it is coming too fast to try to drive without a steering wheel and brakes.
-- The dilemma is, not one investment has all these attributes, and the reason most people do well at many things, but lose money on their investments is because they favor the type that appeal to them, and ignore the others.
Paralysis that leads to being caught unprepared and losing money happens because we aren’t able to get ourselves to take action when we find something we don’t like about an investment. But that means doing only those things that appeal to us emotionally and that we find familiar and comfortable. There aren’t any investments that I like everything about. If anything was actually that good, they would not let us buy it.
--So every investment we can get has something wrong with it. It is either not safe enough, doesn't grow enough, or isn't liquid enough. I repeat, one of these things is wrong with every single investment you or I own, but the bad news is this stops us from using the tools that don’t naturally appeal to our emotions, whether they would do us good or not.
Politicians having trouble getting things approved call this “allowing the perfect to be the enemy of the good.”
Creation of a portfolio means engineering and crafting together a bunch of imperfect investments, each of which has something we don't like about it, but which crafted together make a group of holdings that combined, fill our needs. Combined, the portfolio can give you the assurances you need to be able to look forward to having some money in the future – that means safety.
Combined, the portfolio can give me the growth I need to stay ahead of inflation and actually end up with more money than I have now, by using my capital to help others get what they want. The portfolio can also provide us with enough flexibility so we’re free to take advantage of new problems and opportunities. Portfolio design is really an engineering job, not the search for the perfect investment, which can be defined as those investments that best match our own personal emotional makeup.
Engineering a portfolio is analogous to engineering a bridge. Concrete is very strong and reasonably priced. It is great to put under things. Steel on the other hand has great tensile strength, and can stretch across a long span. Steel, though, is much too expensive to build a bridge out of. Whether you love concrete or love steel, our society has learned to combine concrete and steel to make an affordable, strong bridge. Building a portfolio is not fortune-telling. It is engineering.
Bottom line. By creating a portfolio of assets, many of which have attributes you don’t like and attributes I don’t like, we have been able to engineer a portfolio with these attributes:
-- If the dollar collapses, we will be fine.
-- If the dollar is strong, we will be fine.
-- If the U.S. economy continues to strengthen we will benefit.
-- If the developing world continues to catch up with us in many ways, we will be fine.
-- If the prices of raw materials and food commodities soar, we will be fine.
-- If U.S. optical and broadband mobil technology continues to proliferate around the world, we will be fine.
Here is the rub. The gambler who bets on when and exactly how any one of those scenarios plays out, is willing to make a huge bet on his belief. If he wins his bet and guesses right, he will outperform us. But for each winner like that there will be countless losers, who made huge bets and were wrong about either the facts or the timing. I prefer to look forward to a promising but uncertain future comfortable in the knowledge that we will be fine.
Part 3 Coming Soon! - Daniel Frishberg
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