STREET DOGS

FJZ: Do you think the investing public has gotten smarter?

PB: I think my answer would be no … I don’t think that many individual investors have learned that the more you press, the more problems you’re going to get into. They have not learned that, and maybe they never will. A lot of investors feel it isn’t hard, they just don’t know how. Because the more you think this is easy, the more you persuade yourself that you can take the heat. And then, the sooner the oven gets hot, the more shocked you are and the worse you get burned. After 50 years in the investment business I still haven’t got it all clear. And that’s okay, because I understand that I haven’t got it figured out. In a hundred years, I won’t have it all figured out.

JZ: How can investors avoid being shocked, or at least reduce the risk of overreacting to a surprise?

PB: Understanding that we do not know the future is such a simple statement, but it’s so important. Investors do better where risk management is a conscious part of the process. Maximising return is a strategy that makes sense only in very specific circumstances. In general, survival is the only road to riches. Let me say that again: Survival is the only road to riches. You should try to maximise return only if losses would not threaten your survival and if you have a compelling future need for the extra gains you might earn. The riskiest moment is when you’re right … that’s what diversification is for. It’s an explicit recognition of ignorance. Somebody once said that if you’re comfortable with everything you own, you’re not diversified. I think you should have a small allocation to gold, to foreign currency….