Thinking
“We think the best way to minimize risk is to think.” —Warren Buffett (2004)
We live in the age of opinions. There are opinions on what to buy, what to wear, where to travel, and where to invest your money all over the place. And some people—maybe many people—are willing to put in less effort when it comes to investing their money, or picking someone to do it for them, than they do in figuring out what to wear to their cousin’s wedding.
Boom. Bust. Recession. No recession. Exponential growth due to advancements in Artificial Intelligence. Fed hike. Fed pause. Fed cut.
Pick your opinion above, and you’ll find plenty of prognosticators willing to prognosticate on such an outcome. And many of them will also tell you how to allocate your portfolio and invest your money. More stocks. No stocks. More bonds. No bonds…. Opinions aplenty.
But risk management isn’t so simple. It takes some knowledge. It takes some effort. Allocating your capital to 60% stocks, 40% bonds—or some similar allocation based on a short risk survey—leaves you open to risks that might be outside the bounds of your sample size. As Warren Buffett continued on from the quote we used above during the 2004 Berkshire Hathaway Annual Meeting:
The idea that...you say, “I’ve got 60 percent in stocks and 40 percent in bonds,” and then have a big announcement, now we’re moving it to 65/35, as some strategists or whatever they call them in Wall Street do.... It just doesn’t make any sense.
What you ought to do is have — your default position is always short-term instruments. And whenever you see anything intelligent to do, you should do it. And you shouldn’t be trying to match up with some goal like that.
Short-term instruments pay a reasonable return these days. If you need a place to park your money, you can earn a reasonable return as you spend the time thinking about what to do with your capital—hopefully more time than you spend figuring out what to wear to your cousin’s wedding.
“People calculate too much and think too little.” —Charlie Munger
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