This weekend, because I am pretty much the greatest person in the history of the world (and modest!), I helped out a local non-profit raise some money. Please, don’t send me any flowers. Your accolades aren’t needed.
The task involved helping out at a casino. The Alberta government allows non-profits to send volunteers to local casinos to, essentially, do pointless busy work. Tasks include exchanging chips for money, moving the chips to each table, and counting the money at the end of the night. I was on the late shift, which meant my task was to open each cash box and then sort the money inside. Other volunteers would then count it, and then it was put away. Pretty simple stuff.
By closing time, we had amassed more than $100,000 in cash. This was a fairly typical night, I was assured. A good night might have a quarter mil in cash, while the best handful of nights would leave the casino $500,000 richer. There’s also the odd night when luck is smiling down on the players and the house actually loses money.
I was really amazed at the cash just sitting there at the end of the night. It was easily the largest amount of money I’d ever seen in one place. The staff, naturally, were not very impressed. Stacks of $10,000 were casually thrown into a sack (not one with a dollar sign on the side of it, alas) for deposit at the bank as casually as you or I would toss a $20 bill on the table after enjoying a meal. The room was secure, so the money wasn’t going anywhere. Everyone was just so nonchalant about the whole thing.
And then I started to think about it, and I’ve realized the same thing has happened with my finances. And for a while, it was a pretty significant mental block.
I bought my very first investment when I was 18 years old. It was a crummy old rental property that cost about as much as a new car.
I agonized over that thing for weeks, even after my dad (who was an experienced real estate investor) gave the property his approval. That house represented all the money in the world to me at that time. It was terrifying to invest everything into one asset, even if that piece of property came with a 20% cap rate.
But I did it. And it worked out great. 15 years later that property continues to ooze cash every month. That money is then reinvested in other assets.
I recently invested $20,000 into a new private mortgage. I won’t bore you kids with the details, but I will say this. It was one of those deals that made so much sense it took about 5 minutes to make the loan. It checked off all the boxes.
In 15 years $20,000 went from being a life-altering amount of money to something I can decide to invest in five minutes.
I haven’t just gotten richer in those 15 years. I’m more experienced, I’m smarter, and I’m about a million times more confident, too.
I’m also making way less of a commitment. I had pretty much 100% of my portfolio in real estate after I bought that house. That mortgage is only a small part of my portfolio today. If it goes badly it sucks, but I’m not screwed.
Like the casino employees, I’ve become desensitized with larger sums. It’s just not that big of a deal anymore.
The diversification lesson
This all begs the question: if you’re already rich (or on your way there), does it make sense to take huge positions?
I argue no. At some point, it becomes a little more about maintaining what you have versus growing the pile. You become more worried about losing money than maximizing your return. This is why my portfolio has plenty of asset classes like preferred shares, junk bonds, and those private mortgages I’m always talking about. They provide nice sources of income without the risk of underlying equities.
Many of the great investors disagree with me. Warren Buffett has huge amounts of capital invested in a handful of great businesses. Bill Ackman has the majority of his fund’s assets in just a few names. And some of the smartest retail investors I know only own a few stocks.
But at this point, I just can’t do it. Even though the amounts I invest in a new position would make 18-year-old Nelson wet his bed in fear (ed. note: that wasn’t urine), I still limit my biggest holdings to just a few percent of my net worth.
If you’re just starting out without much to lose, then putting all of your eggs in one basket might make sense. I did it and it worked out well. But if you’re already well established, I’d say it’s better to play it safe.