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Investment Basics

Posted by John Reed on

I spent about a year and a half reading all the great books of stock and bonds investing. I was not trying to be a stock or bond guy. Rather, I noticed that each of the various investment fields including gambling and insurance had strengths and weaknesses.

My main field is real estate investment by mom and pop millionaires. That is not institutional real estate (Trump stuff). Real estate investors suck at risk management. Stock and bonds guys are better at it and insurance is great at it. Real estate is great at letting you manage the business.

Behavioral economics

One if the great books on investing is by Daniel Kahneman. He and Amos Tversky invented behavioral economics. My most recent book, the American Principal Residence Is The Most Advantaged Investment on Earth: Maximize Yours, has a chapter on behavioral economics, which is mainly being aware of your own stupid biases to make sure you are not screwed up by them.
One is people value what they own, like a share of Nvidia, more than an identical share of Nvidia that they could buy. Dopey.
One of Kahneman's observations is we would all be better investors if we just made fewer decisions. The index fund greats like Warren Buffett and John Bogle restate it as buy an index fund then forget about it. Do not look at it every day to see what it is worth. Kahneman invested in index funds.


Another big principle is diversification. Do not put all your eggs in one basket. Lack of diversification implies you can predict stock or bond prices. No one can. Lack of diversification means your net worth will probably fluctuate more wildly. Higher highs and lower lows.
Unless you are so rich that lower lows are irrelevant to your happiness and financial health, you should not be risking lower lows. Investing for most of us is not a parlor game like crossword puzzles. It is possibly losing your life savings.

No bonds

Professional investment advisers say you should have part of your savings in bonds and the older you get, the higher your percentage of your net worth should be in bonds.

That is total bulls***. It is pre-1929 advice. When the Depression started, the U.S. debt-to-GDP ratio was 17%. US bonds turned out to be one of the best things to own in the Great Depression. Also US Postal Savings Accounts (which no longer exist).
No more. Today, the U.S. debt-to-GDP ratio is 124%, the record highest it has ever been. The U.S. government is daring America and the world to start refusing to accept U.S. Dollars. I expect America and the world will do just that. That is called hyperinflation. The most famous was in Germany, Austria, and Hungary in 1921-1923. Wheelbarrows full of paper German marks were needed to buy a small bag of groceries.
Who suffered the most during that hyperinflation? seniors who owned government bonds, who were on pensions, and non-profit institutions who held their endowment in the form of government bonds.

Uncorrelated asset diversification

Combining uncorrelated assets to diversify portfolios lets you reduce your exposure to the risks inherent in certain assets and smooth out fluctuations in your portfolio as a whole. This strategy lets you mitigate risk and therefore get a more smooth and stable performance. 
Correlation between assets can change over time so you have to reexamine if periodically.

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