My friends in the investing community will say that to build your wealth, you need to concentrate your money on a few positions.
Especially if you have put a lot of effort into researching what you need to own.
That was always my idea until I realized there are a few major drawbacks:
- Survival bias: There are a lot of people who concentrate and blow up. Only it is mentioned less. I’ve heard plenty when my colleagues describe a client’s situation where $4 million is reduced to $2 million as a result.
- The evidence seems to indicate that concentration is not always the best.
- Everything runs on a few eggs, so you have to be very sure or keep a close eye on those eggs! Chances are not many people can do that.
This is exactly why, when we look at 1000 people, this concentration and diversification becomes a game of luck where we overestimate the success of concentration in investing.
The most important question to ask yourself is: How would you live with yourself if you were wrong?
Some could, some couldn’t.
Perhaps that is why some choose to take their own lives, or what is guilt for some has become shame due to the overwhelming loss of concentration.
In life we also live in concentration without realizing it.
Derek Hagen tries to remind us of this don’t put all your values in one basket.
Derek explains that we can organize our values unconsciously or consciously in two ways:
The first might be a value system that resembles a pyramid, because there are some values that are more important. It would look like something above.
We can contrast this with a value system that comes from more sources, such as the one above.
This is sooooooooooooo similar to whether you connect your light bulb in series or in parallel, hahahahah.
The problem with a system where one or two values are more important to you is this:
If making money is your whole life, and when you retire and stop making money, what defines you?
“If the most important value in a pyramidal value system collapses, the entire concept of life is in ruins.”
The same can be said about family if you lose them in various ways (perhaps going abroad for work).
Sometimes these things are planned and they can also be unplanned.
Mark Manson mentions this God value or the thing we all unconsciously worship.
Do we unconsciously worship work?
The parallel light bulb method is more… balanced. If you lose one value, you’re still pretty whole.
- If family is your anchor, you can add balance through learning, health or friendship.
- If work gives you purpose, explore creative or spiritual outlets that express who you are beyond your job title.
In a way, I felt that many of us happen to worship some divine value while focusing enough. You can focus on investing, but the same question still applies How would you live with yourself if you were wrong?
Maybe it’s more like what life would be like if that value is gone?
If you ask that question and nothing comes back to you, then maybe it’s time to put more things aside and think about why you’re only hearing echoes and nothing comes back.
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You can read more about my thoughts on Interactive Brokers in this Interactive Brokers Deep Dive series, starting with how to easily create and fund your Interactive Brokers account.
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Kyith worked as an IT Operations Engineer from 2004 to 2019. He currently works as a Senior Solutions Specialist at Insurance Start-up Havend. All opinions expressed on Investment Moats are his own and do not represent the views of Providend.
You can view Kyith’s current portfolio herewho uses his Free Google Stock Portfolio Tracker.
His favorite investment broker is Interactive real estate agentsallowing him to invest in securities from various stock exchanges around the world, at very low commission rates, without custody fees, near spot currency rates.
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#good #idea #concentrate #life