Avoiding disaster after 50
Charlie Munger of Berkshire Hathaway said that he could’ve doubled his net worth by avoiding one dumb mistake.
“That’s not me being dramatic. It’s just arithmetic” he said. “Compounding works on your gains, and on your stupidity.”
Interestingly the mistake in question was selling a great investment due to boredom, and to chase more exciting options.
By the time you’re 50 most of your biggest moves in life are probably made, noted Munger.
You’ve chosen your career, where you’re going to live and your family situation, and your capacity to take on big life-changing risks is probably going to be lower.
The focus should probably therefore shift to avoiding stupid mistakes, rather than trying to be a hero and predicting the next big thing.
“Tell me where I’m going to die (so I won’t go there)“
Although people love talking about their greatest investments, the key challenge after the age of 50 is usually avoiding disaster, because you’ll have less time to recover if you blow up your account.
It doesn’t make rational sense to take on wild risks after the age of 50 because you’re envious of someone else with a bigger house or a better car than you have.
Munger said that envy is the worst of the seven deadly sins, because you don’t even get any pleasure out of it…you just feel lousy, and envy ruins more portfolios than recessions, he said.
Envy and ego won’t make you a better investor, but they will likely push you into stupid investments or speculative bubbles.
And it happens…a lot!
To finish first, you must first finish
At the present time there is a lot of leverage in the global financial system, and there are of course many investors demonstrating a chronic fear of missing out (‘FOMO’).
So much so that even relatively small daily declines in financial markets appear to be flushing out some hugely leveraged speculators.
At least if this happens to you at 30 – while naturally unpleasant – you still have another 30 years to recover.
But that’s not so much the case if you’re over 50.
People may chuckle at your slow and steady investments when the latest fad is booming, but when the tide turns history shows that people can go broke very quickly.
What you ideally want over the age of 50 is durability, and a simple investment strategy which avoids complexity, rather than an exciting or thrilling approach.
Instead of trying to be the smartest investor in the room, you want to be the investor with the most staying power, so – unlike those who rely on their career for income – you can continue benefiting from compounding for life.
