What you’ll learn:
- Investment is not about picking the right financial product (like stocks or bonds or mutual funds)
- There’s an investment strategy that is based on your values and relates to other goals of your life - like elimination of stress
- There is a way to gain from disorder and chaos, not only go through it
- That your time, money and energy can be used to help both yourself and the world
- How to be financially secure even if you are not rich
When making investment decisions, people often choose from prepackaged “risk-rated” investment portfolios. I will show you a different approach and expand the possibilities. We will include investing in yourself, creating your own business and investing in your children as an investment strategy. I think buying some random stock that a financial advisor recommends you, or going with government bonds is not a good idea for most people. While this article is about finance, I will show you how you can use this in virtually any area of your life.
The myth of “medium risk investment”
Let’s start with medium risk investment. It is usually something like a government bond. Since governments can print money at will, the risk is considered low, because if they run out of money, they can “always” print some more money, up to a point which is the melting point of the country’s currency. Some people argue we are pretty close to this point, at least in Europe where I’m from. I am not going to give you an economic outlook because we are kitchen investors and honestly we don’t need to understand this much for the strategy to work.
What makes the investment medium risk? You won’t make much, but you won’t loose much. The upside (how much you can make) is fixed. If the bond returns 2% p.a., you will never make more than 2% p.a. on the bond itself. So the upside (the possibility of a return) is fixed, and it is relatively small. I would argue that it does not make you any money, it would probably not even make for inflation (rising prices). So what’s the downside? The worst that could happen is that the country defaults on its bond and gives you some proportion of the principal or nothing in the worst case. So the possible downside is 100%. If you paint the picture like this, it’s not a good medium risk strategy; the downside is unlimited, and the upside is very limited.
Unbreakable cups and antifragility
Enter Nassim Nicholas Taleb, the author and philosopher who coined the term Black Swan - an improbable event with a high impact (very simplified explanation). In his recent book called Antifragile, he is talking about all kinds of objects in the world and how they respond to chaos, uncertainty, time, and/or entropy. He is a former options trader, so investment is his primary domain, but he also talks about health, countries, entrepreneurship, marriage and other things. It’s one of the best books I’ve read, ever. I highly recommend going through it, if you have the time.
He talks about the objects being either fragile, robust or antifragile. Let’s take a porcelain cup. If you throw it to the floor, it will break apart. It is “fragile to collision with other objects”. It will break and cause ruin - the cup is no good anymore. The only upside is applying an old superstition and saying it will bring you luck. And luck is something we don’t want to rely on when investing our time, money and energy.
Then you have a plastic cup. You throw it on the floor, and it will not break. Nothing will happen to it. It is robust. So what is antifragile? Can a cup become better by falling on the floor?
Let’s take another example - exercise. Let’s take weight lifting. Your body can lift some weight, say you pick up a plastic cup from the floor. It is robust; you apply force, and nothing special happens. But let’s say you find something a little bit heavier, something that you are not used to. Your muscles get stressed, damaged a little bit, and the body reacts. More muscles grow. You apply force that clearly does harm to your muscles, and then the body responds by fixing them and making them stronger. Your body is antifragile to lifting heavy stuff. Of course, until a point where it becomes fragile again - if you try to lift a truck hard enough, the damage to your body would be unrepairable.
So the same object can be either fragile, robust or antifragile, depending on circumstances.
Are our investments fragile?
Let’s look back at our investment portfolio. If waters are calm, and the economy is doing well, you gain 2% p.a. If anything happens, if you apply uncertainty, entropy and chaos, it will never grow more, it can only fall. So your medium risk investment portfolio is as fragile as it could be.
So what was the goal of medium risk investment portfolio? Make sure you don’t loose much (so don’t risk much), but for upside, we want the sky to be the limit. And the last time I checked, the sky was not capped at 2% p.a.
The barbell strategy
Taleb has a strategy for this, and it works with many real world problems besides investing. He calls it a barbell strategy. He describes it as “marry an accountant and have an occasional fling with a rock star”. No, I’m not suggesting you actually do that.
Here’s how you build a barbell. Take 80% (or 90%, depending on the parameters) and make sure they are something, that is of value to you regardless of anything else. For me, it is an apartment I live in, some Euros (currency that is used in the country where I live), some gold and some silver. No debt such as a mortgage, no third party obligations. A good check if you picked the right thing into this part of the barbell is that you don’t care about its value. I am not checking what’s the market price of my apartment at all. I don’t care. I have to live somewhere, and if the price of my house raises on the market, the other houses rise in price as well. So it’s not an option for me to sell it and buy something else cheaper nearby. So how much is the apartment I live in worth right now? I don’t know, and I don’t care at all. How much is a thousand euros worth compared to Japanese yen? I don’t care, as long as the prices stay more or less the same. There’s a possibility of currency collapse, hence gold. One ounce of gold buys you a custom tailored suit, and one ounce of silver buys you a night stay at a hotel anywhere in the world. And it has been this way for hundreds of years. All of these are not making money for me; I want to ensure that they are not losing value over time, but that’s all. I can have a check once a year or so and slightly rebalance them (when gold is cheap, I exchange some more euros for gold, I don’t do that the other way around because I earn new euros anyway).
So now we have something that does not loose value for us - the composition of this part of the barbell will be different for everyone. The check is intuitive and emotional - would you care if the value of this dropped a little or a lot? If your gut feeling is “I don’t give a ….”, you found it. Don’t even think about upside; you don’t care about upside here at all - if it has an upside, it has hidden risk, so if you feel “I’m gonna gain something from this,” something’s wrong.
Now the other part of the barbell (20% or 10%, depending on what you choose). It’s the riskiest thing you can find. The question is - can this earn me a huge return? Don’t think about downside at all. You can lose it all; it does not matter. This part of the investment portfolio for me is an investment in myself, entrepreneurship and some leisurely cryptocurrency speculation. It might and should contain investment in your kids (not Taleb’s recommendation, it’s mine).
Investment in myself - is there something I can do that has the possibility of hugely increasing my upside? Something like a personal development investment maybe? Or learning a skill that will double my market value? Maybe an investment in my health and fitness that increases my productivity? It might be a dead end (we don’t look at the downside here), the investment strategy might not make a return. But if it gives me two more productive hours a day, better friends, a skill I can sell on the market - all of these can have huge yields. Much more than 2% p.a. for sure. But think about something that has 100% to 1000% return on investment. Of course these are as risky as they can be. But we are not looking at downside at all. Why buy stock of a Fortune 500 company? Unless you know something that the whole world does not know, which is very unlikely, the expected returns are already reflected in the price of the stock. Plus you have no idea how the company is run and no control of the people running it.
Do you have a cousin or a nephew or a friend that has an amazing startup idea that clearly resonates with you and solves a big issue in the world? Invest in them! Do you have such idea? Do it! Starting companies these days is incredibly cheap and contrary to public belief, doing business is not about talking to investors, but rolling up your sleeves and solving a problem. Preferably an irritating, recurring problem that you dream of being solved. Here’s a gut feeling - is there something in this world that pisses you off so much that you are angry even when you think about it? Solve it! Thanks to the barbell strategy, you don’t care if you fail - at all (don’t go into debt though). But if you win, you make a lot of money and solve the problem - and your emotional issues - at once. Looks good to me.
Barbell strategy is antifragile
Let’s have a look at the fragility of this strategy. The world is in chaos, you have your house, your gold, the course you took is of no value and your companies are bankrupt. You are at 80% of your wealth, and you are doing great. That’s the worst case scenario.
Let’s say some of the upside strategies worked. You gained a skill, your smart kids help you with solving an issue and you made 300% of the 20% part of your barbell investment. You have made a 60% return on your whole investment (if we count the 80% that did not move up or down).
Some technical strategies
Some strategies and precautions. Never move money from one side of the barbell to the other. Yes, your business might need that extra $10k that you have on the other account. Next day it might need another $15k. This strategy is definitely not called “barbell strategy,” it has a different name - “Gambler’s ruin.” And ruin is the real result of this approach. Cover your losses, bankrupt the company and start something else. You still lost only 20%. Or find an investor. Don’t go into debt! (For some, the story of Elon Musk risking his last money for the fourth SpaceX launch might come to mind - yes, it might work sometimes. If it had not, there would be no Tesla and Elon Musk would most probably be making a living as a speaker at conferences, speaking about his financial ruin. He would definitely not be a famous entrepreneur we now know. It was a stupid gamble that paid off. Please, don’t do that).
People that are new to gold ask me about this a lot. There are several options. Let’s get the worst option off the table first - don’t buy a gold certificate from a bank. They have a long history of not having the gold you pay them to store for you. There’s a longer history of confiscation of gold. The other options are: Buy a safe and buy either gold bars or gold coins. It does not matter what’s on them that much, but the most famous are easiest to sell, these are Canadian Maple Leafs, Krugerands, Wiener Philharmonikers and Austrian Mint. Among these, buy the one that is cheapest, although the price is usually similar. They would state a price on them, an ounce of philharmoniker says “100€”. That’s the price that the European central bank guarantees it will pay for that coin. You can safely ignore this; it is worth ten times the amount. It does not matter.
The other option is to rent a safe deposit box at a bank. Since they don’t know what you have there and you know you have real gold there, it is a better option and it has better security against burglars than your house.
The third option is to store it at a reputable gold storage vault. I use Goldmoney for this service. They facilitate gold storage in vaults around the world. In case something bad happens in your country, you can “move out” and claim your wealth elsewhere. I am not suggesting something bad will happen, I don’t know. But we’re protecting against downside on this side of the barbell, and that means we have to protect ourselves against the possibility of something bad happening. We want no downside here.
Gaining from disorder
We live in an uncertain world. With antifragile strategies, we can make the uncertainty work in our favour. We can gain from disorder and help the world while doing so. For me as an entrepreneur, having this “safety net” (the 80% side of my barbell) gave me emotional peace. Before, even when my businesses were doing extraordinary well, I felt threatened. The uncertainty was too high and it showed in my emotional life and in my personal life. Now I am confident that I can live - even for a few years - from the 80% side of my barbell. I own the house where I live, have no debt and I can feel safe regardless of how my businesses are doing. That makes growing them and working on them enjoyable.
So how to gain from disorder? If there is a crisis, world (or your country) is in chaos, but your own roof is not on fire. You actually have some cash and you can buy assets that are cheap because of the turmoil. You can look at the world around you with clear eyes and ask yourself: “What is the best way to help people right now?” And by helping people, you gain - you grow as a person, you feel accomplished and you create value for people, which usually means financial profit for you. This way, your 20% side of your barbell will grow. That’s the ultimate way to gain from disorder.
A few years back, my situation was different. I was not poor, but the uncertainty caused me a lot of emotional issues and anxiety. I don’t consider myself a rich person. I am probably just an average guy from a weird european country. But here I am, writing about my financial strategy and my financial life is giving me stability and strength. The fun part is that you can apply the barbell strategy to almost any part of your life - do the things that limit your downside 80% of the time, do the things for potential unlimited upside 20% of the time.
If anyone is interested, we can discuss barbell strategies for other parts of our lives.