In this edition, some wise words on diversification, risk, knowing how much is enough and getting better by subtracting.
1. Howard Marks on Risk
The human mind yearns for certainty and the way it does that is by looking at historical events, accounting only for what has happened previously and relaying on patterns. But nothing is certain, one has to always be prepared for the unexpected.
I tell my father’s story of the gambler who one day hears about a race with only one horse in it, so he bet the rent money. Halfway around the track the horse jumped over the fence and ran away - Howard Marks
2. Nick Maggiulli and Charlie Bilello on diversification
We all know the benefits of diversification and why it is important to not bet everything on one asset class. Diversification isn’t some holy grail that ensures your portfolio has zero risk, there will always be times when some asset is doing badly. However, people want to optimize for everything and instead end up diworsifying.
Diversification is ultimately an ongoing battle against relative underperformance. Brian Portnoy said it best when he wrote, “Diversification means always having to say you’re sorry.” And it’s so true. - Nick Maggiulli
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What would those same investors say today, 34 years later, with the Nikkei (Japan) still below its 1989 peak? They’d probably say that the best time to diversify is when it’s the last thing you would ever want to do. Because that’s when you need it the most. - Charlie Bilello
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3. Novel Investor: Addition by Subtraction
The goal of investing should be to eliminate things that have a high probability of producing losses. These are things that you know won’t work. Things you don’t understand well. Things that are too complex. Things that are distractions and noise. Things that lead to mistakes. Things that are irrelevant, unimportant, and unnecessary to your process. Anything that doesn’t fit what you’re trying to do should be cut out.
4. Elizabeth Muldowney: Do I Have Enough?
But the rush never lasts; the satisfaction dissipates. The only way you can replace it is to repeat the cycle. Truth be told, you never can have enough stuff, as you need to keep getting more when seeking this type of satisfaction. Here, in self-actualization, you will realize stuff is not what fulfillment is made of, and you realize, often later than you should have, that you had enough stuff a long time ago. Yes, you can enjoy it, but there is a limit. Enough is when you feel content, at peace.