Genius and folly are oftentimes very closely linked together. Both imply going against convention and yet they are measured by entirely different outcomes. History is a brutal judge in how we remember those that did seemingly great or utterly stupid things. Ronald Wayne, who sold his 10% holding of Apple shares for $800 probably thought he was doing the right thing at the time, whereas we all know Donald Trump is a Jenius (yes, he actually wrote that). So, what is it then that we can do, so that we make only the wisest of decisions when it comes to our investments?
Lesson number one, is size of bet. It’s all fine rolling the dice, and remember the markets are random and the future is wholly unpredictable. That we cannot change, but what we can control is how much money we want to risk in the investments we make. We all know Jerome Kerviel lost €5 billion when he doubled his Eurostoxx position every time it went down. On the other hand, no one cares if you did the trade of the century and you only made £3 in the end. So don’t try to be a hero and bet it all on black, but spread your bets and make sure you never lose so much that you can’t keep playing the game.
Lesson number two, is parameters of control. We are all our own worst enemy, because the very act of making an investment is that we like what we see. In other words, we tend to fall in love with the trades we put on. Rightly so, and who wouldn’t want to be short German government bonds here. I mean who in their right mind would pay someone to lend them money anyway? But therein lies the problem, because you know, I thought the same thing a few years ago and long-term Bunds have gone up more than 100% since then. The only way to protect oneself is to put in place a number of maximum loss, and act upon getting out of the investment if that money is gone. It’s sort of like a prenuptial agreement between us and our investments, and it truly is all about the money in the end.
Finally, we need to play the field. Many people confuse investing and trading. We buy and hold equities for the long term because we want growth. We buy bonds to receive fixed income. But for everything else, the name of the game is spreading your risk. In other words, don’t just play roulette, but also the blackjack, poker and baccarat tables. Statistically speaking, we need at least twenty different types of investments to be diversified. That should make for some very happy hunting indeed.