#96: The Risk Of Turning Into The Biggest Egg in Your Basket.
Diversification is one of the golden rules in investment management. How to apply it to ourselves?
There isn’t an explanation for everything. Luckily.
I have been wondering why have I been lucky and someone else hasn’t? Why did my friend go down a rabbit hole and I was fortunate enough to stumble without actually falling?
Oddly, I am the clumsy one, physically unfit and not really mindful. He had been there before, managed to step back into life, consciously reflected on his experience and kept working on himself. As if this hadn’t been enough.
The next storm always comes and the question isn’t if, but when and how bad.
Our behavior is a function of us and the environment. Most of us accept the fact that we cannot control the environment. It’s just impossible. Acting as the master of our own destiny is challenging at best, if not entirely impossible.
This is where diversification and circular reference come into play.
Diversification says that we shouldn’t just set on one horse, put all eggs into one basket or invest all funds into one stock. It’s aimed at minimizing risk and optimizing returns.
Applying diversification to my own situation means that I don’t spend my time on one single project. Various sources contribute to my overall income. I take the lead on one of my own initiatives and support others with their ideas. It’s all interwoven on different layers:
me and them
lead and follow
earn and invest
fun and impact
So what is the circular reference then all about in this context? Once you invest too much into yourself, you turn into your biggest dependency. All you can hope for is that nothing bad ever happens to you, because if it did, you could only rely on yourself to pull you out of the mess of your own making.
This definition of the circular reference says it all:
«A circular reference refers to a formula, that visits its own or another cell more than once in its chain of calculations, creating an endless loop (…).»
You look at yourself for the solution on how to resolve your problem, which has become so big that you can no longer control it. You come to realize that it has become bigger than you. The endless loop represents you talking to yourself about yourself.
That is also when you no longer understand what is going on with yourself, which is why Warren Buffett is right in saying that «wide diversification is only required when investors do not understand what they are doing.»
Believe me. There always comes a point when you no longer understand.
Diversification isn’t the solution as there is no single solution.
And yet, it helps.
I know now.
