Same as ever

If there were 1000 versions of your life playing out right now, how would you guarantee financial success in 999 of them? The answer lies in embracing timeless truths about human nature and financial markets. When you use timeless truths to guide your decisions, you needn’t rely on luck. Here are three such truths illustrated by insightful stories:

The punch that killed Houdini

After a performance in 1926, Houdini invited a group backstage to meet him. As he started greeting the group, a skinny Canadian student named Gordon Whitehead punched him in the stomach without warning. The kid met no harm ‐ he was trying to reenact a stunt he'd seen on stage, in which Houdini gets punched in the stomach by the largest man in the audience and doesn't flinch. But unlike that punch on stage, Houdini didn't see this punch coming, and he winced in pain afterward. The next morning, Houdini felt a horrible pain in the spot where Whitehead punched him. Hours later, Houdini died from a ruptured appendix. As a famous illusionist, Houdini survived being thrown into a river chained up, and being buried alive because he saw those events coming. His biggest risk was the punch he couldn't see coming. At least once a decade, the world breaks in unexpected ways. So instead of trying to predict every way the world could break, we should create an investment portfolio that can withstand a variety of unexpected economic storms. Here are two ways you could do that:

• Invest in several uncorrelated assets (i.e., things that increase in value over time for different reasons). Investor Ray Dalio discovered that a portfolio of 15 uncorrelated assets can reduce one’s downside risk to an unexpected event by 80% while generating average market returns.
• Have more of your portfolio in a safe money market fund than you believe is necessary, so when the world unexpectedly breaks you can still sleep at night and don't feel the need to panic‐sell your stock holdings. Also, having more cash readily available allows you to take advantage of a once‐in‐a‐decade opportunity.

The California Superbloom

After six years of drought and fires, Californians got exactly what they were hoping for…and much more. In 2017, California experienced record rainfall and a superbloom that turned desert towns green. Times were good, so what happened next was shocking. After the record rainfall stopped, the record vegetation died, which became dry kindling and fueled some of the largest wildfires California had ever seen. Too much of a good thing becomes a catalyst for a bad thing ‐ a timeless truth that takes many forms.

In financial markets, optimism leads to greed, greed leads to more debt, more debt causes instability, and instability produces a recession. The stimulus everyone loved during the pandemic created the inflation everyone hated. If you're not careful, your success can be a catalyst for failure and stress. Housel says, “Paranoia leads to success because it keeps you on your toes. But paranoia is stressful, so you abandon it quickly once you achieve success. Now you’ve abandoned what made you successful and you begin to decline—which is even more stressful.” There are two ways to counteract this cycle and combat complacency without having to live in a perpetual state of paranoia:

• Adopt a Jeff Bezos “Day One” approach ‐ regardless of your company's size or success, wake up each day with a startup mentality.
• Pull a Jerry Seinfeld and see a new opportunity before you exhaust your current one. Housel writes, “Jerry Seinfeld had the most popular show on TV. Then he quit. He later said the reason he killed his show while it was thriving was because the only way to know where the top is, is to experience the decline, which he had no interest in doing.”

The world's largest man

Robert Wadlow was six feet tall at age seven. At age 11, he was seven feet tall. His record growth did not lead to remarkable strength as you see in superhero comics. Wadlow was incredibly weak, so weak that he required steel braces to stand. Just before he died at age 22, he stood nearly nine feet tall, and getting blood to his enormous body strained his heart, elevated his blood pressure, and formed a large ulcer on his leg. That ulcer got infected and killed him. Fast growth leads to frailty and reduces one's lifespan ‐ this is true in many facets of life. The opposite is true as well. If you were patient enough to slowly grow your money in an S&P index fund over any 20 years in the last 70 years, you would've been rewarded with a 700% return on average and had a 0% chance of losing your money. But sadly, most people are too impatient to follow this massive upside, minimal‐downside strategy because they try to compress that natural 20‐year investment window.

No less than 90 percent of all investing blunders are caused by investors trying to compress this natural time horizon…A good summary of investing history is that stocks pay a fortune in the long run, but seek punitive damages when you demand to be paid sooner.