Know Your Weaknesses

When making investment decisions, knowing what we are putting our money into is extremely important. That should go without saying. If we don't know what we're buying, we're simply gambling on price movements, and in the long run the casino always wins. A strategy based solely on charts and price movements is a sure fired way to loose. Even if we get things right 80% of the time, we'll loose, because our losses during the other 20% will far outweigh our gains during the times when we get things right.

However, knowing what we are buying is not the most important thing when it comes to investing. The most important thing is to know our weaknesses. Personally, I'm prone to pride, sloth and greed, which is a terrible combination of negatives when it comes to investing. Pride makes me reluctant to sell at a loss, greed makes me eager to buy too early, and sloth means that I never study things too carefully. This makes me terrible at picking individual stocks.

My particular combination of weaknesses makes it important for me to stay with simple stuff that move in mega-trends. To win, I have to put my money into index funds, gold, and real estate, and do so according to a balanced plan. Anything else will end in disaster. The only form of betting I can let myself into is to weigh my investments according to simple metrics such as the Gold to Monetary Base ratio, the P/E ratio of S&P 500 and the Dow to Gold ratio.

Patience yields wealth