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Wealth is the slave of the wise. The master of the fool. - Seneca
Capital allocation is the study of opportunity cost. This skill is extremely important as it helps usher in resources to the highest return areas. This will not and cannot solve all problems, but if structured and incentivized correctly, can alleviate many ills.
Capital allocation rests on three elements: character, goals, and experience. With patience, luck, and sound judgment, meanwhile, one keeps moving forward. That’s the nature of the allocation game: every now and then a grand slam, but mostly foul balls.
Judgment singles out opportunities, fortitude enables one to live with them while the rest of the world scrambles in another direction.
Be fearful when others are greedy. Be greedy when others are fearful. - Warren Buffet
Capital allocation is not open heart surgery, investors who skip elementary steps stumble sooner rather than later. It is wise to develop a systematic approach towards investing and to follow it as much as possible. Don’t hesitate to be Bayesian and update ones priors, but one shouldn’t need to blow up ones system, rather it is a refinement of the system overtime based on high signal information.
The more complicated the investment advice the less useful it is. If one doesn’t understand options trading, leverage, derivates etc. Don’t waste time learning the Greeks. Keep it simple and stay consistent.
If one acts in the present with ones mind on the future, ones present action will be with a divided mind, and will not be effective. Put ones whole mind into present action. This is one of the most pervasive aspects of modernity, ones attention is being jockeyed for at all times. Hit the like button, scroll the feed, post a pic. DISTRACTIONS. Limit distractions, eradicate procrastination, and take action.
In an environment where ones attention is constantly divided and ones models extend outside of ones Dunbar number the understanding of mimesis is vital. Ones desires are shaped by models, the person one admires. So in turn, what that person (model) desires, becomes ones object of desire as well.
One has to remember that The Joneses, or now anyone one can see on social media, aren’t as rich or as happy as one thinks they are. They experience the same wants and desires as anyone else. No human lives out side of the feeling of acquisitiveness. The power of mimesis influences everyones desire, focus, and eventual use of resources. Understand the game being played and leverage it for successful outcomes.
Shortcuts usually grease the rails to disappointing outcomes. Get rich quick and get poor quick are two sides of the same coin. Humans are risk adverse, so the feeling on the way up is great but the feeling on the way down is devastating. Aesop’s slow and steady wins the race rings true. One must get rid of the thought of competition and increase in tempo. Low time preference is key to wealth accumulation.
One is to create, not to compete for what is already created. One is to become a creator, not a competitor; one is going to get what one wants, but in such a way that when one gets it every other man will have more than he has now. A rising tide lifts all boats, this is the beauty of innovation and growth. Capitalism is not a zero sum game of one loses and the other wins. Rather it is a way to increase the prosperity of everyone who participates. There is never any hurry on the creative plane; and there is no lack of opportunity. When one gets out of the competitive mind one will understand that one never needs to act hastily.
Judgment lies in recognizing which way the fundamentals point. Conventional wisdom and preconceived notions are stumbling blocks as well as signs of opportunity. Investing is not a very complicated business; people just make it complicated. You have to learn to go from the general to the particular in a logical, sequential, rational manner. Ask about anything you don’t understand. They beauty of living in information rich environments is the asking questions is cheap. If the answers you receive are still ambiguous move on. Either the person explaining it doesn't understand it or it is above your head. Either way, don’t waste you time.
Conventional wisdom suggests that, for investors, more information these days is a blessing and more competition is a curse. Actually, the opposite is true. Coping with so much information runs the risk of distracting attention from the few variables that really matter. Because sound evaluations call for assembling information in a logical and careful manner, my odds improve, thanks to proliferating numbers of traders motivated by tips and superficial knowledge.
By failing to perform rigorous, fundamental analyses of companies, industries, or economic trends, these investors become prospectors who only chase gold where everyone else is already looking. There is an inverse relationship between investment performance and time spent watching financial media. Media is clamoring to get attention. Information is cheap. Parse the signal from the noise.
If one is overly excited about an investment, it’s probably a bad idea. One needs to thoroughly research potential investments for the tradeoffs. Life is all about tradeoffs. Money deployed to one investment is money not deployed in another. Unless you use credit, this is a post in itself… Never be overly convinced that one investment will lead to prosperity. The reward is always balanced by the risk. Market corrections come more regularly than Easter, except them and always have a plan in place to capitalize.
A raise in income shouldn’t translate to an immediate raise in lifestyle. It is easy to get carried away by the idea of a bump in income allowing for one to spend more. This is a dangerous game and the hedonic treadmill never stops - it only goes faster. Use that extra income to invest or save towards long term goals.
Ones life is a better benchmark than the S&P 500. Don’t give up piece of mind or well being for a little extra yield. A man’s highest happiness is found in the bestowal of benefits on those he loves; love finds its most natural and spontaneous expression in giving.
A house is a place to live, not an investment. If living in the USA, this might almost seem counterintuitive as it seems real estate just keeps appreciating. This is not the case in other parts of the world and may also be troublesome for those in the USA. It comes down to opportunity costs, money in a home cannot be productive in other areas that may return superior yields. If real estate is your path to wealth, then pursue it diligently.
Don’t be fooled, the mortgage broker is lying about how much house one can afford. Its all about incentives, the broker is not necessarily aligned with the person on the other other end of the deal. The old rule of thumb used to be that ones mortgage should not exceed 25% of ones income after taxes. This heuristics is now a relic and people are essentially house poor and restricted because they wanted the extra sq footage. Buy less, save more.
For many men, the acquisition of wealth does not end their troubles, it only changes them. - Seneca
Admire people who earn more money and save it, not the people who spend more money than they make. This point is an underrated one in the current era. In the vast ocean of social media it is much easier to get attention by consuming rather than saving. It’s easier to show off a new car rather than an extra share of the S&P 500 or one more Satoshi.
One deosn’t have to be rich to invest, but one has to invest to be rich. Invest in ones mind and ones skills first, the money will follow. One can diversify oneself into mediocrity. One doesn’t need to be a mathematician to make sound money decisions. Financial success is 5% intelligence and 95% discipline. Pick investments that are simple and provide good returns. If one doesn’t follow stocks buy an index, if one likes liquidity open a high yield savings account.
Forecasting is for the weather. One will never be able to time the market. It’s not about timing it, its about time in the market. Allocate a reasonable amount of capital on a regular basis and get back to the other aspects of healthy and happy life.
Compound interest is the 8th wonder of the world. Set up to benefit from it rather than battle against it. Don’t rack up debt at high interest rates that will never be paid back. Don’t pay interest to acquire something that loses value. Say no to the overpriced new car.
In the inverse, remember the rule of 72. 7.2% return doubles ones money every 10 years. The stock market returns ~8% per year. A penny saved is more than a penny earned. Never reach for yield. The saying high risk = high reward is fitting. If an investment or company is offering a high yield that means it is quite risky. Know ones risk appetite before diving in.
Fees erode performance. Always consider the fees when making an investment or eliciting advice. Nothing is free. If someone is managing money they want to be compensated. If one is investing in index funds there is a fee too.
The experienced in affairs always rate the MAN whose services can be obtained as a partner as not only the first consideration, but such as to render the question of his capital scarcely worth considering, for such men soon create capital; while, without the special talent required, capital soon takes wings. - Andrew Carnegie
Every person naturally wants to become all that they are capable of becoming; this desire to realize innate possibilities is inherent in human nature; we cannot help wanting to be all that we can be. Thought is the creative power, or the impelling force which causes the creative power to act; thinking in a certain manner will bring one wealth, but one must not rely upon thought alone, paying no attention to personal action. That is the rock upon which many otherwise scientific metaphysical thinkers meet shipwreck—the failure to connect thought with personal action.
Thus, at least a portion of critical edge when it comes to capital allocation amounts to nothing more mysterious than remembering lessons of the past and how they tend to repeat themselves. This is pattern recognition par excellence - intelligence in action. One cannot become a captive of historical parallel, but one must be a student of history. Cultivate a simple idea or thesis and carry it through seriously.