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March 7 - March 20, 2020
Instead, they hunt for investment opportunities that offer what they call asymmetric risk/reward: a fancy way of saying that the rewards should vastly outweigh the risks. In other words, these winning investors always seek to risk as little as possible to make as much as possible. That’s the investor’s equivalent of nirvana.
Yet all three share the same obsession: how to reduce risks while maximizing returns.
One way to achieve asymmetric risk/reward is to invest in undervalued assets during times of mass pessimism and gloom. As you’ll learn in the next chapter, corrections
One of the most serious problems in the mutual fund industry, which is full of serious problems, is that almost all mutual fund managers behave as if taxes don’t matter. But taxes matter. Taxes matter a lot.”
1. Diversify Across Different Asset Classes. Avoid putting all your money in real estate, stocks, bonds, or any single investment class. 2. Diversify Within Asset Classes. Don’t put all your money in a favorite stock such as Apple, or a single MLP, or one piece of waterfront real estate that could be washed away in a storm. 3. Diversify Across Markets, Countries, and Currencies Around the World. We live in a global economy, so don’t make the mistake of investing solely in your own country. 4. Diversify Across Time. You’re never going to know the right time to buy anything. But if you keep
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One reason why diversification is so critical is that it protects us from a natural human tendency to stick with whatever we feel we know. Once a person is comfortable with the idea that a particular approach works—or that he or she understands it well—it’s tempting to become a one-trick pony! As a result, many people end up investing too heavily in one specific area.
For example, David told me how individual investors can diversify by owning low-cost index funds that invest in six “really important” asset classes: US stocks, international stocks, emerging-market stocks, real estate investment trusts (REITs), long-term US Treasuries, and Treasury inflation-protected securities (TIPS). He even shared the precise percentages that he would recommend allocating to each.
Ray revealed one of the great secrets of his approach: “The holy grail of investing is to have 15 or more good—they don’t have to be great—uncorrelated bets.”
In other words, everything comes down to owning an array of attractive assets that don’t move in tandem. That’s how you ensure survival and success. In his case, this includes investments in stocks, bonds, gold, commodities, real estate, and other alternatives. Ray emphasized that, by owning 15 uncorrelated investments, you can reduce your overall risk “by about 80%,” and “you’ll increase the return-to-risk ratio by a factor of five. So, your return is five times greater by reducing that risk.”
I learned that courage was not the absence of fear, but the triumph over it. The brave man is not he who does not feel afraid, but he who conquers that fear. —NELSON MANDELA
Because it’s important to understand that there’s never absolute certainty in life. If you want to be certain that you’ll never lose money in the financial markets, you can keep your savings in cash—but then you’ll never stand a chance of achieving financial freedom. As Warren Buffett says, “We pay a high price for certainty.”
if you live in fear, you’ve lost the game before it even begins. How can you achieve anything if you’re too scared to take a risk? As Shakespeare wrote four centuries ago, “Cowards die many times before their deaths; the valiant never taste of death but once.”
You can never know what the stock market will do. But that uncertainty isn’t an excuse for inaction.
A simple rule dictates my buying: be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread. —WARREN BUFFETT IN OCTOBER 2008, explaining why he was buying stocks as the market crashed
I suggest you commit that line to memory: “Over the long term, the stock market news will be good.” If you truly understand this, it will help you to be patient, unshakeable, and ultimately rich.
The point is, you want an advisor with the skills to tailor your portfolio to suit your specific needs. A one-size-fits-all approach to asset allocation can be disastrous.
The moral: never bet your future on one country or one asset class.
The investor’s chief problem—and even his worst enemy—is likely to be himself. —BENJAMIN GRAHAM,
Neuroscientists have found that the parts of the brain that process financial losses are the same parts that respond to mortal threats.
Our beliefs are what deliver direct commands to our nervous system. Beliefs are nothing but feelings of absolute certainty governing our behavior. Handled effectively, beliefs can be the most powerful force for creating good, but our beliefs can also limit our choices and hamstring our actions severely.
“Is it a three-to-one? Is it a five-to-one? Can I get disproportionate rewards for the least amount of risk? What’s the potential upside and what’s the risk on the downside?”
“Where are the breaking points for other investors? When will the price get so low or high that they will get out?”
“Is this truly the hard trade? Does it really have asymmetric risk/reward? Is it a five-to-one or a three-to-one? What’s the entry point? Where are your stops?”
80% of success is psychology and 20% is mechanics.
As Ray Dalio told me, “If you know your limitations, you can adapt and succeed. If you don’t know them, you’re going to get hurt.”
Mistake 1: Seeking Confirmation of Your Beliefs Why the Best Investors Welcome Opinions That Contradict Their Own
The truth is, it’s never wise to fall in love with an investment. As the saying goes, love is blind! Don’t get swept off your financial feet.
The key is to actively seek out qualified opinions that differ from your own. Of course, you don’t want just anyone with a different opinion, but rather someone who has the skill, track record, and intelligence to give another educated perspective. All opinions are not created equal.
“It’s so difficult to be right in the markets,” he told me. “So what I’ve found very effective is to find people who disagree with me and then find out what their reasoning is. . . . The power of thoughtful disagreement is a great thing.” As Ray explains, the key question is: “What don’t I know?”
I explain what I believe, and then I ask: “Where could I be wrong? What am I not seeing? What’s the downside? What am I failing to anticipate? And who else should I speak with to deepen my knowledge?”
Great things are not accomplished by those who yield to trends and fads and popular opinion. —JACK KEROUAC
“The biggest mistake that the small investor makes is to buy when the market is going up on the assumption that the market will go up further—and sell when the market is going down on the assumption that it’s going to go down further.”
“Individuals tend to buy funds that have good performance. And they chase returns. And then, when funds perform poorly, they sell. And so they end up buying high and selling low. And that’s a bad way to make money.”
invest in a portfolio of low-cost index funds, and then hold them through thick and thin. This will give you the market’s return, without the triple burden that active investors must carry: exorbitant management fees, high transaction costs, and hefty tax bills.
The best way to win the game of investing is to achieve sustainable long-term returns. But it’s enormously tempting to swing for home runs, especially when you think other people are getting rich faster than you!
Remember, as Warren Buffett says, “The stock market is a device for transferring money from the impatient to the patient.”
mental phenomenon is “loss aversion.” The trouble is, losing money causes investors so much pain that they tend to act irrationally just to avoid this possibility! For example, when the market is plunging, many people sell their battered investments and go to cash at exactly the wrong moment—instead of snapping up bargains at once-in-a-lifetime prices.
By failing to prepare, you are preparing to fail. —BENJAMIN FRANKLIN
For example, these simple rules and procedures will make it easier for you to invest for the long term; to trade less; to lower your investment fees and transaction costs; to be more open to views that differ from your own; to reduce risk by diversifying globally; and to control the fears that could otherwise derail you during bear markets. Will you be perfect? No. But will you do better? You bet! And the difference this makes over a lifetime can amount to many millions of dollars!
Every day, think as you wake up, “Today I am fortunate to be alive, I have a precious human life, I am not going to waste it.” —THE DALAI LAMA
For example, if you harness the power of compounding, stay in the market for the long term, diversify intelligently, and keep your expenses and taxes as low as possible, your odds of attaining financial freedom are extremely high.
Because if you master the external world without mastering the internal world, how can you be truly and sustainably happy? That’s why my greatest obsession today is the art of fulfillment.
The First Principle: You Must Keep Growing. Everything in life either grows or dies. That goes for relationships, businesses, or anything else. If you don’t keep growing, you’ll become frustrated and miserable, no matter how many millions you have in the bank. In fact, I can tell you the secret to happiness in one word: progress.
The Second Principle: You Have to Give. If you don’t give, there’s only so much you can feel inside, and you’ll never feel fully alive. As Winston Churchill said, “You make a living by what you get. You make a life by what you give.”
We’re driven by our desire to contribute. If we stop feeling that deep sense of contribution, we can never feel truly fulfilled.
In fact, I truly believe that success without fulfillment is the ultimate failure.
A man is but the product of his thoughts. What he thinks, he becomes. —MAHATMA GANDHI
The trouble is, the human brain isn’t designed to make us happy and fulfilled. It’s designed to make us survive. This two-million-year-old organ is always looking for what’s wrong, for whatever can hurt us, so that we can either fight it or take flight from it. If you and I leave this ancient survival software to run the show, what chance do we have of enjoying life?
This was the path I chose. I decided that I would no longer live in a suffering state. I decided that I would do everything in my power to live in a beautiful state for the rest of my life and to become an example of what’s humanly possible!
A Beautiful State. When you feel love, joy, gratitude, awe, playfulness, ease, creativity, drive, caring, growth, curiosity, or appreciation, you’re in a beautiful state. In this state, you know exactly what to do, and you do the right thing. In this state, your spirit and your heart are alive, and the best of you comes out. Nothing feels like a problem, and everything flows. You feel no fear or frustration. You’re in harmony with your true essence.
