We’re not pessimists, by any stretch, so we’ll apologize now for the “gotcha” headline. But do you always get what you give? No, you don’t.
When you invest a dollar, it rarely works out such that you make only a dollar or lose only a dollar. Returns aren’t symmetrical: it’s not one dollar in, one dollar out. It could be one dollar in… and many dollars out. Or pennies. No guarantees.
Our core investing philosophy guides us toward those investments that are likely to stay robust and provide healthy returns for the long haul. However, there is room in some accounts to consider more speculative investments from time to time.
Take Silicon Valley, for example, which is full of disruptive visionaries trying to turn the auto industry upside down. Maybe they are geniuses, and maybe not so much: they could go broke in the blink of an eye. But if an upstart company can capture 3% of the new vehicle market over the next few years, the payoff may be considerable. That could be an opportunity.
As another example, some time ago we invested in a flyer—a fairly risky company at the time—because we figured we might make five times our money if it worked out, and we would only lose one time our money if it didn’t. There were no guarantees either way, but the potential reward dwarfed the potential cost.
There are examples that ought to be cautionary tales, times when the potential reward is so tiny compared to the potential cost. Consider the choice of racing across the train tracks as the arms start coming down. Potential reward? You could save five minutes. Potential cost? The whole rest of your life.
Not worth it.
We can’t know the future, and we are always dealing with uncertainty. But we can think about the possibilities and work to understand the potential outcomes. This applies to investing and life: it’s why we took that flyer, and it’s why we do the practically free things that might help us live longer, healthier, happier lives.
Do you always get what you give? No, but it’s easier to find our opportunities when we understand the consequences.
Clients, when you’d like to talk about this or anything else, please write or call.