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I TOOK MY FIRST cross-country car trip in 1972. It was the summer of my junior year in college. I’d be graduating the following year and embarking on working life. This would be my last chance for a while to take a long trip. I was traveling by myself, so I had the freedom to decide exactly what I wanted to do.
That’s what brought me to Pikes Peak near Colorado Springs, Colorado. One of the greatest auto races in America is the Pikes Peak International Hill Climb. It’s a timed race. Each car travels up the road alone, racing against the clock.
When I saw the race, the course was a dirt road. Eventually, it began to be paved. Now, the road is completely paved so the race times are faster since a paved road offers more traction.
The race on dirt was much more exciting. As a car took a curve, it would slide sideways. The driver would have to turn the steering wheel in the opposite direction while keeping his foot on the accelerator to keep from going over the side. When you slide, you’re losing time, so it’s important to recover quickly.
I remember watching the race from one of the curves. A group of young kids was watching from close to the edge, while their parents stood farther away from the road.
As one of the faster, more aggressive cars raced past us, it kicked up a huge plume of dirt, dust and rocks. It was an exciting moment. But it was the words of one of the parents that’s stayed with me all these years.
A kid—who’d had dust and dirt thrown at him by the passing car—ran back to his father in a great excitement. His father’s response: “Don’t spit out any teeth.”
My takeaway from the dad’s remark: Focus on the most important thing—not sustaining major damage. Like losing teeth.
When I’m walking with my son, he’s not very aware of his surroundings, including cars. To make sure he isn’t struck, I always grab him by the arm when we’re crossing a road. I want to be sure he gets to the other side unharmed.
I remember benefitting from a similar practice on a fishing trip I took with my dad when I was a kid. We were on a party boat off Long Island. Many fishermen were casting off the sides. I hooked a blue fish. The practice was to move forward, toward the bow, so you didn’t tangle your line with the others.
I had made it to the bow of the ship and was working my line when, all of a sudden, I felt someone grab the back of my pants. It was the captain. He saw this skinny kid fighting a big fish, and he didn’t want me pulled overboard. He waited until I reeled in the fish before he let go. The captain was focusing on the most important thing—no one goes overboard on his watch.
I follow a similar safety-first approach in my financial life. I want to prevent major screw-ups. A drop in the stock market doesn’t mean all stocks will drop. Diversifying—owning many different stocks by buying a mutual fund, for example—reduces the chances of being sunk by a single catastrophic loss like Enron. Knowing how the stock market behaves—its rhythms and tides—prevents me from panicking during broad market downturns.
The late Charlie Munger, Warren Buffett’s vice chairman at Berkshire Hathaway, was asked about his secret to wealth. His response emphasized caution: “I avoided the standard ways of failing.” For example, he famously shunned cryptocurrencies, which he saw as gambling.
Avoid getting your teeth knocked out. Don’t fall overboard. Don’t bet heavily on one stock. By not making the big mistakes, we can succeed.
IMHO, diversification is by far the most important tool for securing portfolio safety. It will not always prevent losses, and it won’t typically deliver the biggest gains, but a diversified portfolio is the best way to feel confident about your investments. Diversification runs along a number of dimensions – stocks vs bonds, time horizons, geography, large-to-small cap companies, investment sector, and riskiness, among others. You may decide not all of these are important to you, but it helps to at least understand them all.
(And look beyond stocks. If you are working for a public company, for example, and you have a lot of its stock, participation in the company’s pension plan (especially a non-qualified plan), some options or restricted share grants, as well as your salary and bonus, you are likely not anywhere as well-diversified as you think you are.)
Thanks Dave!
In life, I worked out 5 lifetime incomes for my personal retirement. Being debt free is also very freeing so if some of the monthly payments get reduced or gone it’s not a big deal.
I also have a rental home portfolio money generator that I don’t tap at this point. That is used to upgrade the homes and make the tenants feel valued.
Multiple ways of income are good indeed.
I’ve learned my lesson with a very small percentage of my portfolio the hard way…Arkk Funds & Kathy Woods
Bad things happen to good companies. I’ll stick with funds, slow and steady win the race.