Hope is not a good strategy

When we started to think about investing, one of our reservations - and a reason that we avoided investing - was that we felt that there was, well, far too much hope involved.

And hope felt like speculation.

Who would like to put one's hard-earned money up for something as fickle as that?

Hope is not a strategy

Yet, if one can make a decent return again and again, consistently, even if one doesn't end up on top every year, as time accumulates, one will have a very good return over one's investment lifetime.

John William Waterhouse, Pandora, 1896.
According to Hesiod, Elpis - the Goddess of Hope - was hiding as the last item in the box.

When thinking through a strategy, as we felt intuitively when we were young, the best path is to try to figure out a way to remove hope. 

If we can look at the strategy without hope for any particular scenario over another, then we're on to something.

Removing hope

For a small-guys investor, there are some ways of removing hope.

• Long-run. One strategy is to go for the long run (read: Welcome to the 1825 day-year)
  
  - If you don't need the money for 20+ years: invest in the stock market (but we have some reservations)
  - If you don't need the money for 5-10 years, invest in some kind of asset allocation

• Creating a well-devised money machine (read about our pathfinder portfolio, or the permanent portfolio), put the money there, and trust the mechanics that a certain withdrawal rate (3% or 4%) should work in the future as well. 

The stomach and the trade-off

The trade-off here is: will one stomach the lower returns when other assets are booming? When the less prudent investors chase hope and gets the fickle rewards as fortune sails in their waters?

Betting on both

The mistake in our youth was to think that there was no other strategy than hope.

But there is, call it the Kelly-criterion, the safer bet, or winning the war - not the battle.

Bleed a little, and win a little, all the time.

Yes, a strategy contains an element that bets on a good outcome.

But it also bets on protection, so even a bad outcome becomes good.

Don't chase the risky bet.

Or as Howard Marks has it: Take care of the downside, and the upside will take care of itself. 

Farewell.

//antinous&lucilius

More reads:

- Amor fati. The art (and Stoic habit) of loving whatever fate has in store for us. 

- Don't predict. The ego-defending little-sister of Hope is the Fortune Teller. 

- How long is the long run? Read: The speed and the destination

- What is asset allocation? Some thoughts here: How we dared to start investing