Concentration and Preparation

A strong, stable, growing, and healthy financial statement requires diversification. Why? Simply because we don’t know what will happen to any particular asset in a given situation. Solomon’s observation was to “divide what you have seven or eight ways, as you don’t know what is going to happen”. That’s good advice.

DIVERSIFICATION? And by diversification? We don’t mean owning 5000 stocks. We mean the intentional building of a strong financial statement with a handful of core asset classes, containing carefully selected assets. And to continue the Solomon quotes, “a three stranded cord is not easily broken”.

George Friedman’s book “The Storm Before The Calm” is one of several to discuss the current social, cultural, economic, and political tension and turmoil. We will discuss such books in a different missive. However, this dissonance and discord is creating more than the typical fear. CONCENTRATION So, what are we watching? On the part of some, a move to concentration. The asset isn’t as important as the principle. Whether it’s CDs, crypto, options, metals, private debt, private equity, or the hope for a moonshot with a single stock, concentration is not healthy for the majority of investors. Why? Lifestyle. Experience tells us to limit our investments in the referenced alternatives to funds which don’t impair our lifestyle if they are gone. And in particular, don’t invest all we have in one particular stock or narrow asset class.

Are there opportunities to invest in crypto, metals, options, private equity, and private debt? Absolutely! Where do they fit? Or where should they fit? The answer to that question is a function of the facts, circumstances, and temperament of each investor.

EXPERIENCE What have we watched over the last 40 years? Those with the largest and healthiest financial statements start with three basic asset classes. Those are cash, including Money Market accounts and CDs, home equity, and marketable securities. Those with the temperament as well as cash flow and asset margin will add investment real estate. Most of these are business owners or serial entrepreneurs. And a handful of these will add business interests/private equity and perhaps some gold, silver, or private debt. Yet we have watched these same business owners limit their risk by investing only dollars they were prepared to lose, in these various alternatives.

What about parking everything in CDs, since they are paying close to 5%? Because most investors don’t have the margin to give up future purchasing power. Groucho Marx was quoted as saying “you can make money in bonds if you have enough of them”. Most of us don’t have the margin required to live on interest from CD’s for the next forty to sixty years. Intergenerational wealth? Something other than CDs.

DRIVERS What’s driving this concentration? Several things though mostly a combination of fear and a hope/opportunity to short-circuit the system. One is a fear of the collapse of the US financial system. Another is a generalized fear of the markets, typically driven by paying attention to fear-mongering headlines.

PREPARATION While we aren’t overly concerned about the complete collapse of America as we know it, we are fans of being prepared for as many eventualities as we can identify. How do any of us prepare? Rather than a discourse from me, I would encourage you to do a search for “preppers” if you are interested in learning.

What have we watched? We have watched some households buy pre-1965 dimes, since they are 90% silver. The owners of these dimes have value in silver and also have a medium of exchange. We have watched households adopt the 21st century version of homesteading. Their home is paid for, and they have land. They have installed heating, cooling, and water flow systems which don’t require affiliation with the electric or water grid in any given area. And they are intentional about learning animal husbandry and growing their own food.

OUR RECOMMENDATION? Be studious. Be intentional. Do your homework. Choose to forego fear. Choose love, power, and a sound and disciplined mind. Start with the three core asset classes. Diversify to seven or eight as you have the temperament as well as the cash flow and asset margin.