Before I start ranting, this post is educational and it’s probably THE most important thing I have learned. It applies to any decision I make in life, including investing but not limited to.
This is an article about making decisions. Now, I am by no means ‘successful’ yet (in terms of being a billionaire, which is how we measure success nowadays). But, I have grown my small wealth exponentially in the last few years, and I have done so by making the right decisions. I have done this by making the right life decisions and by making the right investing decisions.
How do you make the right decisions?
Let the rant begin
I tried playing Bridge once because I too wanted to be a cool kid like Warren Buffett. It’s bloody boring to learn but I soon realized something. It's just about probabilities.
When two computers play chess against each other, the moves they make are predictable, they will follow the move that has been PROVEN (through billions of AI-self simulations) to have the highest probability of winning attached to it (here’s a little hint with where I am going with this article).
Bridge is a game of pure probability.
Making money is similar to a game like bridge. It’s a numbers game but most of all it’s a probability game. It’s just like bridge. That’s why this old fart (Buffett) plays bridge, he plays with probabilities in his spare time because his main job is also playing probabilities. He is addicted to the game. I have read his books, he used to exclude his children from his life, his wife, because he is addicted to the game. I mean that with the utmost respect. I don’t think he had bad intentions, it’s just how he is. I am also addicted to the game, but not bridge lol. At least not yet.
Choose the highest EXPECTED return.
All the Legends understand life on this fundamental level. And there is a simple equation to it. If your goal in life is to make money then it’s easy to just apply this formula everywhere.
Expected return = (probability of winning) X (reward of winning) - (cost of playing)
Playing the lotto? Let’s look at an easy example.
Example (in the long run)
Probability of winning = 10%
Reward = $100.
Cost of playing = $5.
Expected return = 0.1*$100-$5
= $5!
Should you play? Yes. You should play Until the cost of playing = $10 because after that your expected return = 0- in the long run.
In the long at a cost of $10, you will neither win nor lose at these odds. If the cost is below $10 you should play play play.
We get to diversification later.
What the fuck does this have to do with life decisions?
Believe it or not, when I was young and stupid as fuck. I read countless books on opening businesses, Steve Jobs, Richard Branson, etc. These mother fuckers all took CRAZY risks. Richard Branson was on the brink of bankruptcy and running away from bankers who were trying to close his account. He was very lucky to avoid bankruptcy at certain moments in his life, as were other entrepreneurs.
Now, what about all those people who took crazy risks and never made it? Well for every Steve Jobs there are 100,000,000 people who failed. And yes, they may have been smart and capable and they may have persisted but they still failed. I’m not bashing anyone, I have tried to open more than 10 businesses. 1 was a success. This is pretty standard for the success rate of opening new businesses. But I realized the time I wasted was far too much and the capital I wasted in the other 9 businesses ain’t coming back.
But after reading some books on investing I saw the matrix. Why the fuck would I invest my capital into a new business prospect with such high risks, when I can use this simple equation:
Expected return = (probability of winning) X (reward of winning) - (cost of playing)
I can now invest in an ALREADY existing company that ALREADY has cash flows where the expected return is MUCH higher than a private business I could try and open by myself. There are enough stupid investors selling shares cheap in businesses they don’t understand. Businesses like these, which you access through stocks are liquid enough for you to get out if you were wrong, and you don’t have to work on them by yourself.
Bezos
Bezos also does this. I watched an interview where he said something like “I can try and open 10 businesses and if one succeeds I will make 10X more than I invested in all the other 10 businesses combined”
This is a typical expected-return decision. He can easily afford to invest in 10 business “experiments” because he is just playing the probabilities. If one succeeds he has a new billion-dollar business.
To put this into perspective he would only really be investing like 1/100th of his net worth into starting these new businesses. (maybe less)
If I were to do try and start 10 new businesses I would probably need to risk ALL my capital. Not something I am comfortable doing. I am just playing the long-run expected return game. I will be content being ‘modestly wealthy’ even though my goal is to be stinking-rich. (Isn’t it all of ours?). It’s not about the money it’s about freedom.
Applying this to life and investing
When you are making a big decision in life if your goal is money then I can help you. If it’s some other weird Maslows hierarchy ‘self-realization/be happy without money’ bullshit then go and meditate to ‘you are good enough reaffirmations’ because I can’t help you.
When facing a decision IT WILL ALWAYS BE SUBJECTIVE.
your goal is to make it as objective as possible. To weigh the pros and the cons so that you can find out the MOST objective (but still subjective, it’s inescapable) expected return of each decision.
You can apply this to investments.
You can apply this to life decisions.
Which outcome will make the most bang for your buck. Which is most PROBABLE.
Diversification
Unfortunately, most of us cannot diversify where we are born. If we are born in a shithole country where the government is trying to steal every bit of money we make chances are it will be hard to grow a capital base of any sort. Life decisions are hard to diversify because there is only one of you. You cannot spread yourself across different countries. This leads most people to have SUPER concentrated risk in the CURRENCY they earn and the politics/economy of their own country. Diversify OUT.
Stocks on the other hand…every decision you make with stocks will be a subjective one. Your job is to try to FIND the highest expected return …and THEN diversify! We need to diversify because even if you are SUPER sure of a company there are a plethora (a lot) of things that can still go wrong.
So, find a bunch of high expected return stocks and then diversify.
The ‘greats’ are also only human.
Michael Burry invested in Tailored Brands that had so much fucking debt they went bankrupt in the COVID crisis.
There was a story of how Warren Buffett invested in a solar power company that was literally just a Ponzi scheme.
Even though these ‘geniuses’ are geniuses. They are still only human. Your job is to UNDERSTAND as much as you can, and then push that envelope to understand EVEN MORE.
By understanding more you increase the objectivity of your decision and come to a more mathematical less emotional decision. Which is basically how you make money.
You are guaranteed to lose money because we can not be certain. But if you do it properly you are basically guaranteed to make a lot more.
Thanks for coming to my Ted talk
I can physically feel my retarded brain expanding