It Ain't Always Easy
It’s a struggle, I know. There’s so much wrong with the world and so much more that could go wrong.
True, we have witnessed over 70 years of world peace, but to believe that what has been the case in that relatively small amount of time will be the case for the next 50 years would be to fall victim to recency bias.
Ray Dalio very eloquently lays out these ideas in his book The Changing World Order.
I’ll summarize here some key takeaways with a couple of charts and tables:
Firstly, empires rise and fall. Seems like an obvious statement, but I believe it is a consideration few investors take the time to consider these days. Hard to believe that my home country, Spain, was a world superpower back in the 1500s.
In fact, the dollar was originally a Spanish silver coin (thaler).
For most of our lifetime, we have seen a period of US dominance, but according to this chart, the US has peaked. Though not reflected here, China, which for the better part of 20 years has been a growth story, is now facing similar problems as the US.
This is not to say I avoid US assets all altogether or that a major shift is going to happen soon, though it might. This is to say that things change, and investors need to be aware of this.
Perhaps the biggest secret to wealth preservation is diversification
The last 20 years have gotten us used to easy returns, both in stocks and bonds, but this is not the norm.
The last 20 years have gotten us used to easy returns, both in stocks and bonds, but this is not the norm.
The chart above illustrates returns by asset class for some of the world’s major economies. On aggregate, just preserving wealth has been a challenge. We have had full decades, like 1910-1920 where returns in cash equity and bonds were negative across the board.
With that said, for the most part, there was always some area of outperformance. With the right foresight, investors could have done very well.
But even if you get things right most of the time, there were still plenty of black swan events that could have blown up your whole portfolio.
Just to name a few examples, we can see above how wars specifically have been really good at destroying wealth.
Expect the best and prepare for the worst
I don’t mean to come off as a doom and gloom permabear. I am merely trying to highlight the risks associated with investing. This is especially true when you are dealing with a large amount of wealth you want to preserve in the long-term.
And though I am expecting the best, I want to prepare for the worst. Simply consider a few of these questions.
Are fiscal deficits becoming a bigger problem?
Are more currencies today at risk of substantial devaluation?
Is government oversight becoming more or less prevalent?
Is it becoming easier or harder for governments/institutions to seize your money?
But at the same time;
Is technology advancing well beyond our expectations?
Do we have more freedom and opportunities today?
Are investors now capable of protecting their wealth in more ways?
I embraced a long time ago that the world is made up of opposite forces, constantly pulling on each other but also balancing. The ying and the yang.
If you want to be successful LONG-TERM, you must embrace this.
With that said, I present to you the three tenets of my long-term investing philosophy.
Step 1: Stay Diversified
I’ve mentioned this before, but it’s worth repeating since this is so important.
Diversification is the most important way to achieve long-term wealth preservation and peace of mind. Now, it’s very important to also note. This will not get you great gains. Great gains are achieved by concentrating your wealth.
If that’s where you are right now, then you can check out my YOLO portfolio. Again, it’s all about the Ying and the Yang. Ideally, you should allocate some money to a long-term portfolio, and have some money to “gamble”. (Or ff done right, gambling with the odds in your favor)
But in order to preserve wealth in a responsible fashion, you need to stay diversified in many ways:
Diversify your asset classes
Of course. You can’t just own stocks. You also need bonds, commodities, crypto and even alternative investments.
These are the simple tenants of the All-Weather portfolio.
If, indeed, as history shows, the world revolves around cycles, and indeed our capacity to predict them is limited (that’s not to say nil), then we need assets that will perform in every sort of macro environment.
At its most core level, that means being well equipped to deal with rising/falling growth and rising/falling inflation.
Bonds have tended to work well in periods of low growth and inflation. Meanwhile, commodities like energy and gold serve to protect us against deflation. Stocks, on the other hand, work best during growth, although the right companies can perform well in different environments.
To this matrix, we would definitely have to add Bitcoin, which shares many properties with gold, but could also perform well during “growth” periods. Also, real estate.
Diversify your investment styles.
Now, within your different asset classes, we can also diversify. There are, for example, various ways of getting exposure to commodities. Futures, ownership in stocks, or even outright ownership.
Same with stocks. A stock can be any company, and there are literally millions of companies doing millions of different things.
Even when it comes to bonds, we can diversify in terms of duration.
Diversify your Geographies
This is really important too. As we have seen in the table above, anyone who had all their wealth in Russia in 1900, or Germany in 1923, would have lost it all.
A well-rounded portfolio should have exposure to numerous different geographies. Every country is unique, and each has something to offer.
In this area, as investors, we do have some room to get ahead. Just like there are better stocks, there are also better countries. Certain dynamics can show us whether a country is becoming more or less prosperous, and this will have a direct effect on how assets in that country perform.
Diversify Yourself
Lastly, it’s worth mentioning that, in order to be fully bulletproof financially, you need to be diversified too.
Ideally, you should aim to have multiple bank accounts, brokers, income streams and even nationalities/residencies. This is increasingly easy in today’s globalized world, and if done right, it can ensure that there is no single point of failure.
Step 2: Invest in The Right Places
Now, this might be slightly contradictory, so let’s be clear about one thing. I still advocate for being diversified. With that said, we should look to gain more exposure (be overweight) in the areas and regions that hold the most promise over the next decade.
Also, as tides shift, we should be equally ready to switch our allocation to different assets.
In order to do this, we need to understand two things.
Macro and Business Cycles
To the best of our ability, understanding business cycles can help us be better positioned to capture gains/reduce losses in our long-term portfolio. I’m not talking about going all cash or shorting the market. The way I view this is that you should be looking at staying ahead of the curve. When euphoria is at a max, go defensive. When there’s a dip you want to buy, understand what the best way is for you to raise cash.
Macro is something I am deeply focused on, and it guides a lot of how I invest, especially when it comes to short-term trades. However, it also guides many of my long-term trades.
Secular Trends
Beyond the purely macro, identifying secular trends is also a recipe for success. Specifically, I always ask myself two questions;
What are the most interesting areas of growth over the coming years?
To answer this, we must ask ourselves another question: What do we want? Human life is a constant race to fulfil our needs. In fact, our needs are literally never fulfilled. There’s always something more we can do, something new to discover.
With that said, here’s what I see as the key areas I’m looking to invest in long-term.
Healthcare: We have conquered almost everything, but death is still the great equalizer…or is it? Everyone wants to live longer, maybe even forever. Health and longevity will surely be the largest area of growth over the next few decades. People are sitting on millions and billions, and they'd pay any price to cheat death.
AI and Robotics: AI is all the rage, and while I truly believe we are getting ahead of ourselves here, this is the future. Artificial Intelligence will change the way we do business and even interact with each other.
While AI is still forming as an idea and software, I believe the next key level of AI evolution will be its implementation into robotics. Fully independent and functioning machines will be a game changer.
Cybersecurity: As basically all the information we have and create moves into the cloud, protecting it will become a bigger business. The more people can benefit from exploiting cyber weaknesses, the more important cybersecurity will become. This applies both on a business as well as governmental and institutional level.
Energy: Of course, what do all of the above have in common? Everything requires energy, and that’s not going to change any time soon. We are undergoing a massive energy transition, and positioning for the future will be key.
What are the best countries to invest in the next 20 years?
Don’t get me wrong. The West may be declining, but it is still a great place to invest. Especially when it comes to tech and innovation, the US is still unrivalled worldwide. Many of the companies I invest in are located in the US and Europe.
With that said, there are a few countries I am particularly interested in since, in my opinion, they will experience the most notable.
Brazil
India
Vietnam
UK
Step 3: Invest In The Right Way
Secular trends are the macro, but in order to be successful, we must also look at the micro. Once we have identified the right places to invest, we must identify the right companies, too.
What does that mean exactly?
While I have highlighted key areas of growth in the section above, my objective here is to build a robust long-term portfolio.
In other words, I am not interested in speculative ideas right here but rather in companies that can stand the test of time and deliver consistent results to investors.
I want a company that will thrive even when the world is burning around it.
I'll be talking more about this in the End Of The World Portfolio.
Thank you! FYI it’s yin with no g
In Traditional Chinese Medicine (TCM) and Chinese philosophy, "Yin" (阴, yīn) represents one half of the fundamental duality known as Yin and Yang. Yin is associated with qualities such as:
- Darkness
- Passivity
- Femininity
- Cold
- Receptivity
- The moon
- Introspection
- Subtlety
Yin is often contrasted with Yang (阳, yáng), which represents light, activity, masculinity, heat, and outward movement. Together, Yin and Yang describe how opposite forces are interconnected and interdependent in the natural world, and they are essential to understanding the balance and harmony in both the universe and the human body.