Wealth Accumulation vs Wealth Preservation

[Matt]

I constantly bump heads with the young whippersnappers on here about Risk. I know that I might sounds like an old grandpa these days, so want to share some more thoughts on this.

I went through exactly the same thought process as is being shown, quoting lines like 'no risk = no reward' and taking gambles on things. I am probably one of the biggest risk takers that you will meet, some examples have included:

• Moving from a small town in Wales to work on a Cruise ship in Texas.
• Quitting that career and moving to Tokyo with a couple of thousand in funds (on credit cards) a negative net worth, no job, no visa, no accommodation.
• Starting up multiple businesses from then.

From an investment perspective I have done it all - I have traded stocks, options, bonds, funds, both passive and index. From a gambling perspective I still play in casinos and have won and lost sizable amounts.

I love risk

But it needs to have proper reward. There is a correlation between risk and reward, and if I find something that is either too harmful to my net worth, or just doesn't offer the correct ratio of reward to risk I say 'NO WAY'.

Back in the day... (just a few years ago) I stated that wealth accumulation required taking large risks, which I took in the market. If I had not done this my Net Worth would be something like $500,000 greater than today. This is why I advise putting money into simplified investments now, preserving the money that you earn.

Earning is so much more powerful than 'investing'.

If you can control your debt, focus on earning more, you will quickly be in a place where you are worried about Asset Protection not Asset Accumulation from the market. One thing I can tell you from my days in Casinos, you will always hear the stories of the 'winners' but never of the 'losers'. The vast majority of traders in the stock market lose money.

To those who disagree - and think they can only get rich from high risk investments - if it is because you have a low paying job then you should appreciate that you have not invested in yourself enough. If you project forward your salary and it isn't enough to achieve your goals you need to supplement it with training and education.

I want to avoid Ad Hominem arguments on this Forum, but I know that when I had a low net worth I would want to get rich quick from the market, and when I had a higher one then the last thing I care about is making money from the market - I want to make money myself, and protect if from inflation by investing strategically.

So...

If you think that you need to trade in risky stocks, options or IPO's in order to 'get rich' is it because you are not rich? Because I think you might want to reconsider your strategy, and learn from my own mistakes.

What do you think? Do you think that chasing returns from risky market investments is the solution, and if so would you still do it when you are financially independent?

 

[dzcinci]

When I was broke, I scraped $5K together and partnered with a buddy in Swiss Franc futures. After 2 months, we had 4x our original investment. It was very easy to extrapolate that rate of return and envision a very early retirement full of luxury trimmings. The next month we were down ~75% from our original investment and facing margin calls. This was a wake up call to Risk (and stupidity). I would not think of it now (unless it was within my 'gambling' money partly for entertainment purposes).

 

[PedroNY]

Well, this is a great kickoff post about wealth preservation and risk allocation. I frequently read or hear advice that people in their 20s and 30s should be all in in the stock market, that returns (over long term) will outpace any other kind of investment, so over next 30 or 40 years you will make out like a bandit. That is true to a point, and it is only true if you don't buy at peak of the market, don't need that money, and that future will follow past results!

I personally read The Intelligent Investor very early in my career, when my net worth was negative (student loans were higher than all my other assets) and I truly believe in the 75/25 philosophy. That is no more than 75 per cent or no less than 25 per cent of you assets in the market should be invested into bonds or stocks. Diversification definitely a lot of benefit and ultimately your risk is lower for higher return. Follow that up with Margin of Safety and as long as you have a good value buy, then you can take on that risk. That risk is actually much lower then other assets in that class category, because the specific asset you buy has a large margin of safety. That can be expressed in many ways, be it low P/E (and company is not in tailspin) or be it Book Value under 1 (so if you liquidate, you still make money), be it rents are higher than payments (i.e. Detroit real estate), etc.

There is nothing bad about risk taking, it should be encouraged and even if you have a lot of wealth accumulated, you still need some risk taking. Of course, if you have some much wealth it doesn't matter, then you should probably give most of it away to a good cause -- Buffet did it, you can as well!

Cheers,

PedroNY