Thoughtful and Aggressive Principles for Investing
It may seem crazy, but I stopped saving for retirement, and started investing for maximum capital accumulation. This has led me to construct an unorthodox investment portfolio based on a set of principles, convictions about specific assets, and beliefs about the investment environment of the 2020s. My thoughts on how the investment landscape will evolve over the next decade are in constant flux. I am always searching for new ideas, narratives, and opportunities to further increase my returns.
My portfolio is not your traditional 60/40 stocks and bonds portfolio. Over the past 2 years, I have dramatically reduced my position size in index fund ETFs, and increased my allocation to individual assets. As of today’s writing, approximately two-thirds of my portfolio is invested in just 4 assets: Bitcoin, Tesla, Square, and Ether. The remaining third is split roughly equally between cash and index fund ETFs. These are some of principles that led to my unorthodox portfolio construction.
Conviction > Diversification
"Diversification may preserve wealth, but concentration builds it." - Warren Buffett
No one ever became wealthy buying index funds. Most billionaires achieved their wealth through a single company. Jeff Bezos, Bill Gates, and Mark Zuckerberg made their fortunes from the companies they founded. They had absolute conviction in themselves and the companies they were building.
The benefits of diversification have rapidly diminishing marginal returns; The biggest gains in the value of diversification come from the first 5 uncorrelated assets; nearly the full benefits of a highly diversified portfolio are attained with only 10 to 15 assets [Wyatt Research].
Invest in Falsifiable Beliefs
Come up with a belief, also called an investment thesis, about individual assets. It is essential for this belief to be falsifiable. What would cause your thesis to be proved incorrect? Doing this will hone your thinking and allow you to exit bad investments faster.
When I first invested in Bitcoin in August 2017, I also purchased Bitcoin Cash (BCH). My thesis was that BCH had a reasonable strategy to increase adoption through increasing the block size (the number of transactions in a block), and would compete for Bitcoin’s use case as a non-sovereign store of value.
I sold my entire position when I knew my thesis for BCH was wrong. BCH never gained significant traction; vastly more transactions occur in Bitcoin’s relatively small 1 Mb blocks than in the 8 Mb blocks of BCH.
Double down on Winners
"Biggest mistake ever was not to do the Series B round at Facebook," - Peter Thiel
In 2004, Peter Thiel made what is widely considered the greatest angel investment of all time, legendarily buying a 10% ownership stake in Facebook for $500,000. This initial investment grew 100 times in 2 years when Facebook raised additional funding in a Series B round valuing the company at $500 million.
Despite this, Peter Thiel says his own greatest mistake was not buying more Facebook shares in the Series B funding round. Why does he consider this such a grave error? Perhaps it is because Facebook is now valued at $566 billion as of this writing, an over 1000x increase over its Series B valuation! In a Reddit AMA, Thiel stated, “General lesson: Whenever a tech startup has a strong up round led by a top tier investor (Accel counts), it is generally still undervalued. The steeper the up round, the greater the undervaluation.”
Thiel’s general lesson is borne out by the stock market returns of publicly traded companies. Just 4% of all publicly companies in the United States account for all net stock market returns generated since 1926!
Once you have conviction that an investment is a winner, you should not sell - it’s time to double down.
“For everything there is a season...”
The performance of stocks and bonds varies in differing investment environments. This is the reason that most retirement portfolios are usually between 60% and 80% equities and 20% to 40% bonds as it decreases the volatility of the entire portfolio.
However, there is a major blindspot in the traditional retirement portfolio. There are investment environments where both stocks and bonds experience low or negative real returns. The last two times this happened in the United States were the stagflation of the 1970s and the war debt monetization of the 1940s. There is a significant likelihood this will happen again in the next decade as growing government deficits are funded through money printing.
Scenarios like this are why Ray Dalio created the All Weather portfolio at Bridgewater. This portfolio is intended to perform well under nearly all conditions; it allocates 7.5% to commodities and 7.5% to gold to hedge against circumstances where both bonds and stocks perform poorly.
This is a major reason I own Bitcoin and why I am also considering buying gold.
Buy what the Professionals can't
One of the most attractive reasons to invest in Crypto is how contrarian it still is. Bitcoin is severely underestimated despite being the biggest unicorn of the 2010s, worth more than Uber, AirBnb, and Snapchat combined. There is almost no institutional participation in Crypto to speak of. There are many legal, custodial, and cultural barriers that prevent professional investors from owning Bitcoin and other crypto assets. A Bitcoin ETF still has not been approved by the SEC which limits the ability of non-qualified custodians to hold Bitcoin. Consider that Vanguard owns 7% of Snapchat, and Goldman Sachs holds a 4% stake in Uber; neither of these storied financial institutions hold any Bitcoin or Ethereum.
This is one, massive edge that retail investors have in a financial world dominated by professional investors and institutions.