I am listening to a terrific audio book: How to Invest by David Rubenstein. In the book, the author interviewed *the masters* of the investment world including Larry Fink, Sam Zell, Ray Dalio and many others. To my surprise, this book is mostly about investment business, not about investment returns. In a business, there are specific customers the business serves and products and services the business delivers. It’s a good reminder that the investment businesses are not really about delivering some target returns. It is about achieving goals for their customers. Individuals and institutions’ ultimate goals are not about the money itself but what they use the money for. In other words, money is the means to the end, not the end itself. The goals are specific and tangible i.e. covering tuitions for 1000 underprivileged kids per year, supporting breast cancer research or generating sufficient cashflow for living expenses for a family for four.
I believe many people took on too much risk in the past decade. Although I did a lot of risky stuff, I had a financial advisor back in 2012 after the Facebook IPO . After we clarified our family’s life goals, he put us into a very conservative 60/40 portfolio which we still stick to after all these years. It was clear to us that this portfolio is the endowment that will fund my family’s living expenses perpetually. The main goal is to generate sufficient income and to keep up with inflation to cover our living expenses. The annualized return is much lower than SPY 0.00 in the past decade but it does what it’s supposed to do. All my risky bets are outside this portfolio but I can really take a lot of risks because I have something to fall back on even if all my risky investments go to zero.
It was quite shocking to me that some people took risks on individual stocks, cryptos and margin loans without something else to fall back on. I believe it’s an issue of not knowing the real purpose of their investments i.e. financial independence. In silicon valley, I have seen people have goals like getting to XXX millions of net worth even when they already have XX millions, which I believe is quite unhealthy and it’s probably the main reason why people get caught up in the FOMO mania and margin loans because they want to get higher returns. What ends up happening is people take risks on the money they need for their family’s financial security in order to have more money they don’t actually need. And now, a down market is backfiring on this unnecessary risk taking. 2022 is a great reminder for all investors that we need to make sure we have the right priorities first, before foolishly chasing returns we might not actually need.