moses123456
New member
Disclaimer: Personal Finance is deeply personal and opinionated. Everyone has their own opinion. Don't judge others on how they spend / invest their money. If they are able to grow wealth using their method, then good for them. The ultimate goal of money is to be able to save time and to purchase happiness in its various forms.
I grew my wealth using the following mental models:
Having a financial goal of 1 million net worth by 30 isn't a very meaningful goal. You shouldn't have a time restriction or a fixed target that you MUST achieve. Once you realize you can perform better, you can achieve much more. What's the difference between hitting 1 million net worth by 30 or 31?
The goal should be securing a solid financial foundation and financial process to build upon the rest of your life.
Did you fail if you only hit 900k by 30? Why stop at 1 million? Realize that growing wealth is a journey, not a destination. How you mold your financial process matters the most.
In investing, we always hear the phrase, "don't put all your eggs in one basket."
I strongly disagree with this. You CAN put all your eggs in one basket. Just make sure you watch your basket really really carefully. It's easy to watch and carry one basket. It's trying to carry too many baskets that breaks the eggs.
Diversifying capital into many uncorrelated assets also means spreading thin your attention across all those assets and markets. It is very counterintuitive to common thinking. I personally think that concentrated bets decreases your overall risk. If you have few positions, those few have your full attention.
When I looked at investors that have very large reputations — Warren Buffett, George Soros, Carl Icahn — they all have one thing in common. And it's the exact opposite of what they teach in business school, which is to make large concentrated bets where they have a lot of conviction. Buffett has famously said, "diversification is protection against ignorance; it makes little sense if you know what you're doing."
One of the most effective investment strategies I've used was formulating an investment thesis for an asset or group of assets. Forming a thesis requires studying the fundamentals of an asset rather than using empirical assumptions. A sound thesis strengthens conviction.
When I first heard of Bitcoin in 2012, everyone dismissed it as nerd money or a scam. A Wired article called it "peer to peer, censorship-resistant, decentralized money". Internet money? What a bunch of rubbish! Who would use this? I needed to know more, so, I went down the Bitcoin rabbit hole.
After researching all that I can about Bitcoin, my formulated investment thesis was very simple:
Fast forward 9 years later, Bitcoin has become more established and has enabled a larger crypto industry. My domain knowledge grew, and my crypto thesis has evolved. The recent large market crashes has further increased my conviction in the antifragility of crypto. Let me explain further this evolved thesis:
Last May 2021, the entire crypto market crashed 42% in 14 days, wiping out $1 trillion in value. Many crypto coins and tokens fell up to 70%. But, there was no fallout! Leveraged liquidation was offset by over-collateralization. No firm went under. The government didn't need to step in. There were no bailouts, no hyperinflation, no quantitative easing. Blockchains and DeFi (decentralized finance) didn't break and continued to work as normal. Stablecoins remained stable. A few exchanges went down for a few hours, but no exchange experienced big losses. No protocol failed. The system didn't break. It offered zero systemic risk to the broader financial world. Speculators lost money. That's it. Now, the market has fully recovered and has reached new all-time highs.
The crux of the matter is this: form a thesis and execute it. You will be able to focus your attention on specific industries or assets while being able to gain critical domain knowledge to follow-up on that thesis. Impatience and loss of focus results to bad portfolio management.
If you want to maximize your expected wealth N years from now, and you do not want to use leverage, you should put all of your money into an asset with the highest expected return. If you think crypto has higher expected returns than stocks, that means 100% crypto. But many people will find this allocation too risky.
In probability theory, the Kelly criterion balances your expected return vs your risk of ruin. It is a mathematical formula used by investors that determines the optimal theoretical bet size to allocate to an investment. It is popular because it typically leads to higher wealth in the long run compared to other types of strategies. Here's an example of how we can use Kelly to optimize a bet given the risks:
K% = (p / a) - (q / b)
where:
Asset XXX has a 60% chance of increasing in value over 5 years from its current price, thus a 40% chance of decreasing in value. Asset XXX has the possibility to double in value over 5 years. Since it's money invested that I'm willing to lose, then the asset can lose 100% of its value. Therefore:
K% = (0.60 / 1.0) - (0.40 / 2.0)
K% = 0.4
If I have a working capital of 100,000, and the Kelly calculated is 0.4, then the optimum bet size I should use is 100,000 * 0.4 = 40,000.
Note that Kelly is only valid for known outcome probabilities, which is not the case with investments, as you could only estimate. Thorough research on the asset can provide better projected estimates. To reduce risk, you can use half or a fraction of the Kelly calculated (e.g. use only 50% of the Kelly factor calculated), depending on your strategy. The formula can also result to fractions higher than 1. In this case, it is theoretically advantageous to use leverage to purchase additional securities on margin. But you should also note the time horizon in this strategy. In the above example, the bet is in play for over 5 years.
Find a tribe with the same vibe.
Consider what matters most to you in your personal finance journey and then look for people with those values. The journey is more exciting when you're not alone.
You can summarize investing and growing wealth with these:
The confidence to say no to most things.
The patience to wait when there is nothing to do.
The discipline to do common things uncommonly well for a long period of time.
The decisiveness to act with speed and conviction when the time is right.
But as always, take everything I said with a grain of salt. There will ALWAYS ALWAYS be an argument against any of the points I've mentioned above. Every investment anecdote you read on the internet, blogs, books, etc., is a result of survivorship bias. It's MORE important that you expose yourself to as many different perspectives as possible and then form your own opinion and strategy.
I grew my wealth using the following mental models:
Setting the proper goals
Having a financial goal of 1 million net worth by 30 isn't a very meaningful goal. You shouldn't have a time restriction or a fixed target that you MUST achieve. Once you realize you can perform better, you can achieve much more. What's the difference between hitting 1 million net worth by 30 or 31?
The goal should be securing a solid financial foundation and financial process to build upon the rest of your life.
Did you fail if you only hit 900k by 30? Why stop at 1 million? Realize that growing wealth is a journey, not a destination. How you mold your financial process matters the most.
Concentrated Bets vs Diversification
In investing, we always hear the phrase, "don't put all your eggs in one basket."
I strongly disagree with this. You CAN put all your eggs in one basket. Just make sure you watch your basket really really carefully. It's easy to watch and carry one basket. It's trying to carry too many baskets that breaks the eggs.
Diversifying capital into many uncorrelated assets also means spreading thin your attention across all those assets and markets. It is very counterintuitive to common thinking. I personally think that concentrated bets decreases your overall risk. If you have few positions, those few have your full attention.
When I looked at investors that have very large reputations — Warren Buffett, George Soros, Carl Icahn — they all have one thing in common. And it's the exact opposite of what they teach in business school, which is to make large concentrated bets where they have a lot of conviction. Buffett has famously said, "diversification is protection against ignorance; it makes little sense if you know what you're doing."
Investment Thesis
One of the most effective investment strategies I've used was formulating an investment thesis for an asset or group of assets. Forming a thesis requires studying the fundamentals of an asset rather than using empirical assumptions. A sound thesis strengthens conviction.
When I first heard of Bitcoin in 2012, everyone dismissed it as nerd money or a scam. A Wired article called it "peer to peer, censorship-resistant, decentralized money". Internet money? What a bunch of rubbish! Who would use this? I needed to know more, so, I went down the Bitcoin rabbit hole.
After researching all that I can about Bitcoin, my formulated investment thesis was very simple:
- Bitcoin is a programmable peer to peer asset where information can be recorded and protocol rules can only be changed if and only if the majority P2P network agrees.
- There can only be 21 million bitcoins in existence. If only 21 million bitcoins will ever exist and the entire world population wants to hold at least 1 bitcoin, then the price upside was infinite.
Fast forward 9 years later, Bitcoin has become more established and has enabled a larger crypto industry. My domain knowledge grew, and my crypto thesis has evolved. The recent large market crashes has further increased my conviction in the antifragility of crypto. Let me explain further this evolved thesis:
Last May 2021, the entire crypto market crashed 42% in 14 days, wiping out $1 trillion in value. Many crypto coins and tokens fell up to 70%. But, there was no fallout! Leveraged liquidation was offset by over-collateralization. No firm went under. The government didn't need to step in. There were no bailouts, no hyperinflation, no quantitative easing. Blockchains and DeFi (decentralized finance) didn't break and continued to work as normal. Stablecoins remained stable. A few exchanges went down for a few hours, but no exchange experienced big losses. No protocol failed. The system didn't break. It offered zero systemic risk to the broader financial world. Speculators lost money. That's it. Now, the market has fully recovered and has reached new all-time highs.
The crux of the matter is this: form a thesis and execute it. You will be able to focus your attention on specific industries or assets while being able to gain critical domain knowledge to follow-up on that thesis. Impatience and loss of focus results to bad portfolio management.
Risk and Position Sizing
If you want to maximize your expected wealth N years from now, and you do not want to use leverage, you should put all of your money into an asset with the highest expected return. If you think crypto has higher expected returns than stocks, that means 100% crypto. But many people will find this allocation too risky.
In probability theory, the Kelly criterion balances your expected return vs your risk of ruin. It is a mathematical formula used by investors that determines the optimal theoretical bet size to allocate to an investment. It is popular because it typically leads to higher wealth in the long run compared to other types of strategies. Here's an example of how we can use Kelly to optimize a bet given the risks:
K% = (p / a) - (q / b)
where:
- K% — is the Kelly percentage that is the fraction of the portfolio to bet.
- p — is the probability that the investment increases in value.
- q — is the probability that the investment decreases in value (q = 1 - p).
- a — is the fraction that is lost in a negative outcome. e.g. if the asset price falls 10%, then a=0.1.
- b — is the fraction that is gained in a positive outcome. e.g. if the asset price rises 10%, then b=0.1.
Asset XXX has a 60% chance of increasing in value over 5 years from its current price, thus a 40% chance of decreasing in value. Asset XXX has the possibility to double in value over 5 years. Since it's money invested that I'm willing to lose, then the asset can lose 100% of its value. Therefore:
K% = (0.60 / 1.0) - (0.40 / 2.0)
K% = 0.4
If I have a working capital of 100,000, and the Kelly calculated is 0.4, then the optimum bet size I should use is 100,000 * 0.4 = 40,000.
Note that Kelly is only valid for known outcome probabilities, which is not the case with investments, as you could only estimate. Thorough research on the asset can provide better projected estimates. To reduce risk, you can use half or a fraction of the Kelly calculated (e.g. use only 50% of the Kelly factor calculated), depending on your strategy. The formula can also result to fractions higher than 1. In this case, it is theoretically advantageous to use leverage to purchase additional securities on margin. But you should also note the time horizon in this strategy. In the above example, the bet is in play for over 5 years.
Find a tribe
Find a tribe with the same vibe.
Consider what matters most to you in your personal finance journey and then look for people with those values. The journey is more exciting when you're not alone.
Conclusion
You can summarize investing and growing wealth with these:
The confidence to say no to most things.
The patience to wait when there is nothing to do.
The discipline to do common things uncommonly well for a long period of time.
The decisiveness to act with speed and conviction when the time is right.
But as always, take everything I said with a grain of salt. There will ALWAYS ALWAYS be an argument against any of the points I've mentioned above. Every investment anecdote you read on the internet, blogs, books, etc., is a result of survivorship bias. It's MORE important that you expose yourself to as many different perspectives as possible and then form your own opinion and strategy.
