Why an investor should have the right to make a mistake

I’m going to start with a quote from Morgan Housel and try to expand on that thought:

The most important part of any plan is planning in case your plan fails.

I have often used this approach in business. I am unfamiliar with the term “cash gap.” I don’t know what “not paying wages” is. I’ve never taken out a company development loan in my life. Some would say it’s just luck — that’s quite possible. But there is a saying — “Success is simply a matter of luck. Ask any failure.“ ©

In order for “luck” to work for the company, we — the partners — had to accumulate a substantial cash reserve. During the low income times we always had something to pay our employees.

I applied the same principle to my personal finances. I have never had a mortgage, never took out a single loan in my life, never borrowed money from friends. I don’t know what it means to survive from paycheck to paycheck. I just haven’t been in those situations at all. Did I get lucky again? If you count working to fill your financial cushion as luck, then yes.

Investor’s choice doesn’t have to lead to bankruptcy

In 2018, I completely abandoned investing in U.S. stocks. It was a conscious choice based on calculation. I didn’t (and still don’t want to) buy businesses with a 25–50 year payback. Investors simply don’t live that long.🤷♂️

But I really like to buy businesses for nearly free. Our country’s strongest companies have been given away at the price of local street food places for a decade, all because “buying these companies was very risky”.

Below I’ll provide you with some statistics on my portfolio’s returns over the last year.

Source: snowball-income.com

My portfolio of “very risky” and “primitive” Russian companies beats the SnP500 by more than 80%. How is this possible? 😲 Looking for an answer to this question is not necessary because the numbers themselves do not mean anything. All that is shown in the picture is that my plan has worked.

Could it not have worked? Of course it could! But even in a bad scenario, I would still be an obscenely rich man — by dividends, reinvesting, selling liabilities, income from commercial real estate and by the fact that my head was still in place.

Could a catastrophic scenario have materialized? Yes, again, indeed it could. The arrival of the new Bolsheviks, the death of capitalism, etc. But in that case both myself and the adherents of U.S. equities in Russia would be busy with other aspects of life rather than investing.

Courage, on paper

Every day I see rookie investors who “endure” a 50–80% drop in the markets. The virtual battles take place in Excel and Portfolio Visualizer service. In my “Internet youth” we used to call these guys chatting boxers.

In reality, many of these virtual fighters have mortgages, wives and kids. Trouble is bound to come into our lives — getting fired, sickness, etc.. It’s only a matter of time before something gets to you.

I prepare for the unexpected in advance. I do not know what it will look like, but I understand that most of the problems can be solved (or at least smoothed out) with money.

Here is an example. I’ve been building up my immune system for the last 5 years in case I get sick — sports, proper nutrition, health tests, stress minimization, psychotherapy, meditation. But trouble came to our family where no one was expecting it. The illness caught up with my mother.

I told you earlier that she was diagnosed with pancreatic cancer, stage 4 with metastases. The cost of life maintenance (the disease is incurable), according to my rough estimate, can exceed $40,000–60,000. And we have already spent almost $15,000.

Dad and mom decided to sell their apartment in Montenegro. In the comments below the video where this topic was discussed, a lot of naysayers decided to show up and began to reproach me for inhumanity. How could an imaginary millionaire force my parents to get rid of their property?

First of all, it was not my decision. Put yourself in my father’s shoes. Would you want to sit on your children’s necks? I certainly wouldn’t want to. And I’ll do my best not to go begging for money from my daughters when I become old.

Secondly, I have a sister. A divorcee with three kids. The daddy has fogged off and doesn’t pay child support. My sister works and my mom has been taking care of the necessary “woman’s” responsibilities all along. My sister has had to cut her work schedule — instead of 5/2 she now has 2/5. She has to take care of the kids and my mom. And she manages to hold it together by also using the capital from the sale of the Montenegrin apartment. It provides her with extra $300/month, by the way.

Thirdly, most likely my readers are not familiar with our oncomedicine. Yes, the chemotherapy can be done today even under the compulsory medical insurance. But chemotherapy alone is not enough:

• Rapid medical testing plays a decisive role in the fight against the disease. The MHI can’t do anything quickly, you have to pay for it.
• We needed a complete closet change (patients typically lose 22–33 pounds).
• We had to buy rehabilitation medications — several hundred dollars for each prescribed medicine list.
• We also use alternative ways of fighting cancer — physical training, proper nutrition.

Everything listed above costs money. Instead of running around like crazy, begging for money on Facebook, mortgaging apartments, we have unpacked our financial cushion. Now we only spend time helping my mom. I spend a few days a week with her. We take walks together, we talk a lot about the past and the present. And oddly enough, I feel like a happy person.

All of this can be named in 2 words: safety margin. My parents had the option to sell their real estate. I had a financial cushion of $30,000+ on a deposit. I did not have to look at stocks and bonds. We managed to pull through without any extreme measures.

Flexibility

Today, my absolute expenses seem too large to many readers of this blog.

It is true and false at the same time. In absolute terms, the sum is really big indeed. I spend more than $3,500 on my own needs. And another $1,500 (the figure excludes medical costs) is spent on dependents — child support for my youngest daughter, helping my eldest, helping my mom, dad, sister and nephews.

At the same time, my spending pattern is radically different from the average Russian:

• Rent — $850.
• Medicine — $300 (this year will be much more for the reasons mentioned above).
• Groceries — $350–400.
• Clothing and various goods — $300.
• Education — $130.
• Hobbies and sports — $130.
• Leisure — $400.
• Travels (4–5 times a year) — $550.
• Transportation — $180.
• Digital shopping — $70.
• Communication and Internet — $30.
• Unforeseen expenses (repairs, etc.) — $300–400.

Pay attention, there is no place for branded merchandise, expensive toys and show off. I have no car, no place of my own. I’m unlikely to ever renovate an apartment or build a house.

Let’s imagine for a moment that I was wrong. That the dividends would be cancelled for a while, or they would be cut in half. For such a scenario, I have plans B, C, and D.

I can cut back on expenses without any problem. And I can do it only after a couple of hours of thorough thinking.

• Give up traveling.
• Cut back on spending on leisure activities.
• Stop spending money on digital shopping.
• Move to a less expensive place to live in.
• Cut back on education.
• And so on.

This, too, is a safety margin. It gives me the margin for error.

Russian roulette

My Facebook feed is now buzzing with messages about the Korean series “Squid Game”. I succumbed to the general hype and watched it too. Viewers only saw the film as a criticism of capitalism. People are corrupted, society is sick, everyone is ready to do anything for the sake of money.

But I saw something completely different — it was utter stupidity. The characters are ready to risk their main value — their lives — to get rid of their debts. They also do not know how to think of probabilities.

It reminds me of a game of Russian roulette. Yes, there’s only one bullet in the barrel. If you play it once, your chances of survival are great. But I would never sit down at a table if there was a chance of getting shot in the head.

A lot of fellow investors, on the other hand, love to play these games. I’ve already written about leveraged trading, so I won’t repeat myself. This game has the very bullet that can go through your head.

There are many similar games in investing:

• Participating in pyramid schemes.
• Buying real estate in the shell stage.
• High-yield bonds.
• Options.

I’ve never played them, and I won’t. Because I understand the nature of such games.

This is not called “caution”

Someone will say that you have to be careful and cowardly. But the cowardly person will put his money on deposit and eventually would not be able to even keep his capital. I won’t even mention multiplying it.

In investments one necessarily has to take risks. But make sure to take risks so that even the worst-case scenarios do not lead you to bankruptcy.