Whether you listen to Aristotle or Elon Musk, now’s the time to check in on a little investing wisdom…
After a long period of calm, the market woke up in August and slapped investors in the face. A 3% drop on August 5 and a historic spike in volatility sent the markets into a tizzy… at least for a short time.
Now, the market has rebounded to new highs. But everything people thought they knew about Big Tech stocks, the jobs market, and the overall economy has been upended since the first half of this year.
So, in a time of turmoil – especially with the election coming up – you want to turn to the “first principles.”
For that, we should turn to the investing greats – and the minds that inspired them…
Aristotle is usually credited with the original concept of first principles. He called these foundational truths “the first basis from which a thing is known.”
Essentially, he believed that to solve a problem, you had to tear it down to the basics… and then work up to what you were trying to figure out.
Aristotle explains this idea at the start of his treatise Physics – a multibook collection that discusses the way the natural world works. But reading it today, you could imagine that he was talking about understanding the financial markets…
Now what is to us plain and obvious at first is rather confused masses, the elements and principles of which become known to us later by analysis. Thus we must advance from generalities to particulars; for it is a whole that is best known to sense-perception, and a generality is a kind of whole, comprehending many things within it, like parts.
More recently, Elon Musk highlighted this systematic philosophy as the key to his success…
I do think there’s a good framework for thinking. It is physics. You know, the sort of first principles reasoning. I mean by that is, boil things down to their fundamental truths and reason up from there, as opposed to reasoning by analogy.
Musk even explained that it was this kind of thinking that led him to see the opportunities in electric cars and rocket building.
With markets at a critical point, it’s time to check in on the first principles of investing.
Fortunately for us, storied investors like to talk about this stuff. And we can break down their sage wisdom into some key first principles…
1. Minimize losses.
Always dependable for a memorable quote, Warren Buffett says, “The first rule of an investment is don’t lose . And the second rule of an investment is don’t forget the first rule.”
Focusing on making sure you won’t lose is a key thread from the best investors.
Noted value investor Mohnish Pabrai structures his investments similarly: “Heads I win, tails I don’t lose much.”
That’s really just a catchier way to phrase George Soros’ advice: “It is not whether you’re right or wrong that’s important, but how much money you make when you’re right and how much you lose when you’re wrong.”
2. Adjust your strategy for the current market environment.
You also need to understand the moment…
David Tepper, founder of successful hedge fund Appaloosa Management (and the owner of the less successful Carolina Panthers), says, “Sometimes there’s times to make money… Sometimes there’s times not to lose money.”
For instance, the Federal Reserve cut interest rates last month by 50 basis points. And more rate cuts are likely on the way by the end of the year. This is outstanding news for some investments.
Looking at today’s market, this is a good time to build strategies that are safe from the apparent risks driving sudden surges in volatility… and that will benefit from the turning tide in interest rates.
3. Protect your portfolio.
Banker and fund manager Sir John Templeton famously warned, “The four most dangerous words in investing are: ‘This time it’s different.'”
Now is not the time for wild speculations or going “all in” on the market. Valuations look very stretched today. That has always been a recipe for high risk… And today is no exception.
With these words of wisdom echoing through our minds, first principles are telling us how to proceed. At the most basic level, we want to put our money into an investment… and get a little more back.
Most important, we want to sleep well at night.
I’ve stressed many times that you need to be holding cash. Interest rates are coming down, so investing in U.S. Treasurys looks like a great move.
You should also hold other assets outside of stocks. My favorite is gold.
Stocks have soared to new highs since August… But make sure you are prepared for more volatility. Having a bit of your money in cash and in gold is a great way to do just that.
Here’s to our health, wealth, and a great retirement,
Dr. David Eifrig
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Source: Daily Wealth