Double Down On Your Winners
Opinion: Investing in losers to 'diversify' your risk is stupid
As a species we generally don’t like doing things that could get us killed. It’s a good survival mechanic but risk aversion also prevents us from flourishing. We know taking risks is important, it’s why we idealise dare devils, entrepreneurs and get titillated by heroes in movies who risk it all to achieve their goals. Sitting in your cave watching Netflix every day because your worried about being struck by lightning will not lead you to having an interesting life.
The same is true for money. You have to take risks with your money if you want to make any. Unfortunately, you cannot delegate making money to someone else, you have to do it yourself. Here is why.
Nobody Is Getting Rich This Way
When taking investment advice you will never be offered one asset, it will almost always be a portfolio of holdings. This is because the investment industry has signed up to Modern Portfolio Theory (MPT), which aims to maximise returns within an agreed risk band. Diversification is key to this theory and the drive is to keep the risk as low as possible for the gains being sought. MPT does this by diversifying your money over a broad range of asset classes and holdings. This protects an investor from any nasty surprises from individual holdings or sectors but it also means any of the big winners are so diluted that they won’t change your life. This investment model prioritises preservation of wealth over growth (so it should) as nobody wants to be responsible for losing their client’s money.
You cannot delegate wealth creation to a professional, you have to ferret out the opportunities yourself. You must take control and responsibility for your own money creation activities. To generate wealth, you should be doubling down on the winners, taking risk and not betting on dead dogs. The worlds entrepreneurs got rich because they bet big on themselves and their companies, not by diversifying their holdings across the biggest companies in the world.
No Risk No Reward
If you are still young and are looking at your portfolio and wondering how you will earn enough wealth to retire by 65-70 then you need to stop and listen.
The biggest risk you are taking in today’s market is not taking any risk
We believe the younger readers here should be taking as much risk as they can stomach, then they should be growing their resilience to risk so they can stomach even more (the longer you have to invest the more risk you should be taking).
Young people have the time horizon to let their investments run. They can also monitor their investments to make sure they remain viable. This is why we scream ‘Learn before you Earn’ because if you do not take any responsibility with where you put your money you may as well give it to a professional.
Take Responsibility
Investing for your future takes time and effort. You must be inquisitive and look at future trends and logical pathways for exponential growth in markets. Bitcoin appears to be on a trajectory to expand its user base from 1-2% of the population to 80% of the population over the next decade. That is exponential expansion that you can be a part of without having to overthink the fundamentals of how that happens. That calculation in our opinion is simpler and more accurate over say trying to guess if Netflix will stay on top for next 10 years etc.
Diversifying away from your current winners protects you from losses and gains. In our opinion diversifying for the sake of diversifying is stupid. Double down on the winners, don’t have a few % of losers in your bag.
This will mess with a lot of logical minds we know (Don’t put all your eggs in one basket is a state of mind we are trying to unlearn), however it is the magic sauce. Not financial advice, do your own research but consider this.
It’s year 1998 and you could buy a portion of the Internet (the whole thing) would you take that risk knowing what you know now or would you have bought 1% of the Internet and 99% of a mix of Walmart, IBM, Chevron, GM etc
Bitcoin isn’t a company, it’s a rival financial system that cannot be corrupted or manipulated by man or state.
As always, only you can make these judgements
Till next time
The Wealth Gap Team
We don’t offer financial advice.