Bread

“Rather a piece of bread with a happy heart than wealth with grief.” – Egyptian proverb

When I was a junior in college, I made a friend whose father was a Master Baker. Growing up in a suburb outside Chicago, I had friends whose parents were teachers, engineers, professionals - even an FBI Agent! But a baker was different. It felt like a job that was old-fashioned and quaint, reminiscent of a bygone era when milk was delivered to the door in glass bottles. 

One of the most striking things I remember about him were the scars on his hands and forearms from burns. His arms were a living record of his work. In becoming a master of his craft, he faced the inseparable risk of being burned. To bake risks burning, and he baked seven days a week

The burns did not mean he was bad at his job. Far from it - he was gifted at baking and business, distributing his goods far and wide. A master baker who has no scars is simply impossible. Like life, some risk is unavoidable - we simply have to accept it.

The same can be said about  money and investing. Occasionally, even if you are cautious, you’ll get burned. The difference is how we react and accept our wounds. A financial mistake is not a character flaw. Making money, losing money - it’s all part of the risk-taking we embrace when we interact with money.

Bread only requires four ingredients: flour, yeast, water, and salt. A master baker can create a heavenly loaf while a novice may end up with a dense, gummy mess. The difference isn’t the ingredients, is it?

Investing is quite like baking - if you know the formula and have cultivated a reasonable amount of skill, you can create your desired outcome. After much reflection, I have a formula to share with you. If you wish to improve your experience with investing, my advice is to understand the risk, focus on the output, and know yourself.

Risk

First, understand risk in general. There is a difference between risk avoidance and risk mitigation. You can avoid the risk of car accidents if you don’t drive or ride in a car. This is rather impractical, though. You can mitigate your risk of car accidents by driving the speed limit, keeping your car well-maintained, not driving when you are tired or impaired - the risk exists, but you’ve taken proactive steps to reduce it.

In investing, fundamentally, there are two types of market risk: systematic risk and unsystematic risk. Systematic risk is very similar to the unavoidable risk you take when you drive - if you invest, there is always some risk to being invested. It’s the “live with it” risk. The “bake and you’ll get burned” risk.

Unsystematic risk is the type that you can eliminate by diversifying your portfolio. If you have a handful of stocks from different industries and different countries, you can eliminate unsystematic risk. This is the value of diversification. 

There are other risks to consider when you invest, but systematic and unsystematic are foundational.

Output

Remember to focus on the output - what is your purpose for investing? Investing, like baking, is the process - not the end result. A master baker doesn’t bemoan the burn on his arm if the loaves come out perfect.

 The financial industry creates a steady hum of messages focusing on performance - how is the S&P 500 or the Dow performing compared to yesterday, last month, a year ago? The drumbeat is steady and deliberate…this matters, this matters, this matters…but does it? Remember to stay connected to what you invest in and why - this is the output. What happens while your bread is baking might be interesting, but it probably isn’t important to you.

It reminds me of a story from the late 90s when Dr. Bob Goodman was the economist for Putnam Investments.He shared an experience he had at a CNBC appearance. The woman anchor came onto the television set perfectly coiffed and dressed. Just before the camera went live, she was squirted in the face with a spray bottle, her hair was mussed just a bit, and her blouse was ruffled - all in service of creating just a touch of panic about what the “markets are doing”. True story about a hyped narrative.

Stay focused on you - your goals, your values, your output. Enjoy the show for what it is - performative.

Know Yourself

The best investors I’ve observed are those who know themselves well because they understand their strengths, weaknesses, and blind spots.

In my experience working with clients, I find it interesting and mildly amusing how often people who made a lot of money in real estate couldn’t stand the stock market and those who successfully invested in the stock and bond markets had a strong distaste for real estate. The stock market and real estate markets are different, but there are some common elements - at the end of the day, all investments are assets on which you expect a return. People who develop an expertise in one area (stocks or real estate) often have a hard time adapting to the differences of other assets. Are you an expert stock investor? You may find the real estate cycle frustrating. Have you owned rentals for years? Growth stocks may baffle you. This is an issue of personal expertise and adaptability, not necessarily the asset type. An open willingness to learn is the only prerequisite to investing comfortably in different asset classes.

On the other hand, I have also seen people who fall in love with an asset. They couldn’t bring themselves to sell a particular stock or felt that a home should always stay in the family, no matter what. This is a trap to avoid - never fall in love with something that can’t love you back.

There is no rule that says you have to make investments in anything. In fact, if a person is financially secure and doesn’t want to invest, that’s fine. What is important to you? How do you wish to live? How much is enough? These are the relevant questions to explore first before investing.

The bread is what you want out of life. Investing is only one ingredient. Exactly how, why, how much - these are the important questions. Knowing yourself and knowing what you want is the real foundation - the foundation that is completely overlooked and obfuscated by traditional financial services. 

If there were such a title as “master investor”, I’m surely qualified after thirty years in the industry. My skills, my experience, and those lessons that left a mark are available for those who want a partner in financial planning. I’m so glad you are here.