Like many, I was first introduced to personal finance and investing by the Wu-Tang Clan, and I've been diversifying my bonds ever since.
But is diversification a one-size-fits-all strategy for every investor?
Charlie Munger has said that just three public equities can provide enough diversification for your portfolio. I was surprised to read this, as it runs counter to most advice around diversification (including my own).
But I think this strategy makes a lot of sense—just not for everybody.
Munger and his partner Warren Buffet are playing a different game than most. They're buying not just a share in a company, but the whole damn thing. And historically, they've been really good at it.
Since not many high confidence, high expectation bets present themselves, Munger and Buffet bet huge when they do. And they've been noticeably patient with their money during this pandemic.
But stock picking is really hard. There are not many that can consistently beat market indices after expenses, and most of us shouldn't bother trying.
Diversification will inevitably bring regression to the mean. It also reduces drawdowns and volatility. Given that most of us have a hard time realizing the historical gains of the market given these drawdowns and volatility even when diversified across stocks and bonds, adding more volatility and drawdowns to our portfolio in search of greater returns just isn't going to work unless we have the steel resolves of a Munger or Buffet.
While their strategy probably doesn't make sense for us when it comes to stock picking, can the concept behind his strategy be applied elsewhere?
I wrote a blog post on basic personal finance and investing strategy earlier this year, but I haven't been taking the medicine I prescribed.
The short of Taleb's point in the book is that we are often fooled into a false sense of security and fail to prepare for unknown unknowns. We assume systems like the stock market to be robust during periods of low volatility when they are actually fragile. To use his example, we're like the turkeys who for had nothing to fear until the third Thursday in November rolls around. Presciently, Taleb published his book just before the '08 collapse.
So I sold most of my stock portfolio last year to implement what Taleb calls the barbell strategy. This investing strategy features the following:
I've worried that despite selling most of my public investments, my portfolio was still too risky. I had all of my eggs in a single private company that made money from a single product. RZA would backhand me for such folly.
But I think I'm changing my tune. I'm becoming more optimistic about my company's future. And if I'm to take Munger's word that only so many opportunities with high expectation come along, maybe I should double down on FxSound.
I'm wondering too if I haven't misapplied Taleb's recommendations to my own scenario. I'm young. I have no kids. No debt, no car, no problems. If I lost everything tomorrow, I would be totally fine. There are meditation centers around the world that will be happy to take me in, and I'd be happy to join. And if I'd like to stick to the Scrooge McDuck path, I'm sure someone would let me crash on their couch while I scrounge for a job.
The point being, I'm not in the same life scenario as Nassim Taleb. I really don't give a shit about squid ink pasta. And because of that, I can be more aggressive with my resources so long as my bets have high expectation. I think in the case of FxSound, I'm not only becoming more confident in my company's financial expectation, but also in the career capital gained if things go well.
Getting rich from your own company opens doors that getting rich from the stock market simply doesn't.
The great thing about holding cash is that it gives you a lot of options.
Barring inflation, the value of cash is pretty steady. You can also spend it immediately. Stocks, on the other hand, are volatile. And private investments can't be liquidated nearly as easily as stocks can.
But optionality is useless if it's not deployed when the great options arise. And it looks like FxSound may be my best option at present.
The stock market is no doubt interesting amidst this corona pandemic. Market indices have rebounded despite alarming unemployment rates. And as I see it, there's a lot of uncertainty around when stay-at-home mandates will be lifted and consumers will begin spending again. I'm no expert, but I'm failing to see how the current prices reflect reality.
As such, I've begun to literally look into options. I'm intrigued by long put options, but I'm inexperienced and the premiums don't strike me as being obviously underpriced. I think another couple trillion dollar cash injection (and this seems inevitable at this point) could change things, however.
I'll be patient with my money for now. There's some opacity around my company's future that should become clearer in the next few months with the launch of FxSound 2, and I have a hunch that the bargains in the stock market as a result of the corona virus yet remain.
My strategy has changed. I'm not as bullish on diversification or a conservative barbell strategy as I was previously. I'm also realizing that while strategy prescriptions are never one-size-fits-all, there is usually wisdom to be pulled from the concepts behind the strategy.
I'm leaning towards something more like an 80-20 barbell like the following:
Thanks to Meb Faber for the tips on how to play better defense with cash.
I'd like to apologize for suggesting investment strategies in this previous post that I wasn't actually following myself. That was shitty of me. I felt those strategies to be better suited for most people than what I've described here, and while that's probably true, I should have at least said as much.