This is a guest post by Mr. Moneybags. He has recently written the greatest book on investing in stocks ever written…and is offering it for free on his site (for now). So, go download it. Right now. www.meanstock.com/book.
They say love can do crazy things to a person. It can help some people overcome seemingly insurmountable odds. It brings joy and happiness to a person’s life. And for others, it just helps them get through the day. What did it do for me? It taught me how to become a super investor capable of turning an investment large enough to feed a goat for the day into enough to build a nuclear power plant the size of Nicaragua.
And how is this even possible? Let’s start by recounting my personal experience over the last while. Then we’ll tie it together to what it has to do with investing.
I recently got me one of them fancy corporate jobs with a fancy office, a fancier car and a set of fancy little slaves who carry me around from my office chair to the fax machine and back. My diamond-encrusted whip is still in the mail.
So, what can possibly be wrong with this here fancy situation? The stress. I was under so much stress that I could barely breathe. All I could think about was getting through the next minute, let alone the next hour. I would go to sleep stressed and would wake up scrunched in a ball and trying to think of an effective way to get myself fired. It wasn’t the most ideal situation.
Fast forward to a month later, where I was sleeping when I wanted, where I wanted. I would do what I want go where I want. Every time I would enter the building I would be greeted with a fanfare of trumpets and scantily clad women seeing to my every whim. It was bliss.
So, what fundamental change occurred during this one month interval? I fell in love.
You see, in the pre-love phase, this job was all I had. Every time my boss would throw a stapler at me for making a mistake, I would get stressed out. Every time a client would attack me with a shovel for accidentally selling their family dog, I would get stressed out. Every time the phone would ring, my heart would sink, imagining it’s my boss, an angry client, or whoever calling me to tell me what I did wrong. Why was I so stressed out? Because this job was all I had. I couldn’t afford to lose it.
Then I met her. Then I asked her out. Then we went out. Then I kissed her. And she kissed me back. Then we did some things that would get me arrested if I were to share them online. Then we fell in love.
Suddenly, my work life began to drastically improve. Every time my manager would yell at me, I would sit there with a smile on my face. Every time a client firebombed my office, I would sweep away the ashes while whistling a tune. I just didn’t care. So what if I lost the job? I still had her.
So, what does all this have to do with investing? How can love possibly teach somebody to be a better investor? Well, let’s see…
Take a look at my life before I fell in love. My work was the most important thing in my life. Every little marginal fluctuation in that situation would cause a flood of irrational emotions to run through me. Too much of my life was invested in this job. All my eggs were in one basket.
The exact same thing applies to when you have all your money invested in one stock or investment. If the stock suddenly drops 10%, that means you’ve just lost 10% of all your money. If the stock drops 50%, you’ve just lost half of all your money. How can you possibly expect to make any rational decisions if you’ve got all your money invested in one place?
Of course you’re going to freak out if the stock drops a couple points that day! Of course you’re going to cheer and drench yourself in a concoction of champagne and confetti if the stock rises a few percentage points that day! Your whole livelihood depends on it!
Now look at my life post-love. I had a healthy work/life balance. Suddenly I could make rational decisions without worrying that my life was going to come to a grinding halt if I were to make a mistake. And even if I did lose the job, I still had someone to come home to at the end of the day. All my eggs were no longer in one basket. The values in my life were now diversified.
Compare that to owning two stocks, as opposed to just one. Suddenly, it isn’t nearly as big of a deal if one stock falls in price. Every fluctuation’s impact is now cut in half. One of your stocks just fell 50%? Sure, you took a hit, but you didn’t lose half your money – you lost half of half your money. Hell, the other stock can explode in price and make up for the crappiness of the other one.
Sure, both stocks can depreciate in price. Sure, I can lose my job and my love. And that would really, really suck. But both of these events happening at once is significantly less likely than having either of these events occurring.
As life goes on I’ll get married, I’ll have kids, I’ll have mistresses, I’ll have new jobs, probably a helicopter, hopefully a yacht, new ventures, new experiences and pretty much new everything. And so will you.
When I get married, my girlfriend suddenly won’t seem so important to me. When I get a voluptuous new mistress, suddenly my wife won’t seem so important to me. When I have kids, suddenly my mistress won’t seem so important to me. When I get a new car, suddenly my kids won’t seem all that important to me. New things change the way you see old things; they further diversify the values in your life.
Every time you buy a new stock, the fluctuations of the other ones won’t seem as hefty to you as before. That’s what diversification does. It reduces risk. It let’s you think rationally. It let’s you move forward (and back). It’s a pretty great thing. You should use it.
Just don’t diversify too much – your life or your investments. Or you’ll lose track of the things that matter, and will pay too much attention to the things that don’t. Balance is key. At least, that’s what I think.
This post has been written by Mr. Moneybags from MeanStock.com, a site that proves that investing shouldn’t have to make you want to douse yourself in gasoline and run into a forest fire. Don’t forget to download his new book!