Some of the greatest lessons in investing can actually be learnt from our daily lives - but only if we are willing to reflect on them in the first place.
In this blog post, I am going to share with you the concept of weightlifting and how it can make you filthy rich. And this pretty much applies to everything in life.
Excited? Let's begin.
Don't Kill Yourself
Let's say that you try weight lifting for the very first time, and you were inspired by all the other weight lifters who have been lifting weights for the past few years. You wanted to be the same - after all, who doesn't want to look good?
You see that they were able to lift 40kg of dumbbells and you thought to yourself, "Wow, if I can lift 40kg of dumbbells - I will look like him as well!"
Immediately, you decided to lift those 40kg of weight, and you sprain your arms.
What's the morale of the story here?
Well, there are two lessons.
The first is to never discount other people's efforts to get where they are today. While it may seems that they lift those weights effortlessly, it is because of the years of training that they have gone through.
The second is to be patient. Don't try to jump from level 1 to level 100 right away. I know that it is tempting to be an overnight success, but if you are not ready - then you are not ready.
Now, what does that have to do with investing?
Get Filthy Rich With Investing
Investing, like lifting weights, can be trained.
But instead of training our physical muscles, we are training our emotional muscles. And the only way for you to train your emotional muscles is to actually invest. No amount of paper investing is going to help you train your emotional muscles, simply because your real money is not at stake.
So why is training your emotional muscles important?
The biggest reason is this --> It allows you to concentrate your portfolio without losing sleep at night and more importantly, it allows you to be able to invest most of your net worth into the stock market.
Warren Buffett once said, “Diversification may preserve wealth, but concentration builds wealth”.
However, I don't encourage people to concentrate their portfolio right away.
Much like how you wouldn't lift 40kg of dumbbells from the start, concentrating your portfolio at the start is going to hurt you - real bad. Simply because, emotionally, you have not trained yourself to manage portfolio concentration.
At the same time, I will never want to diversify a portfolio into 20 to 30 stocks...
That's why I came up with a starting guideline for various portfolio size.
It is important to remember these are merely starting guidelines. As you train your emotional muscles and think that you can concentrate your portfolio and still sleep at night, that's the secret to how investors build to their million dollar portfolio at short period of time.
In fact for myself, based on my portfolio size, I should only be allocating 10% of my portfolio to each company. But at the point of writing, I allocated up to 25% of my portfolio into a single company - simply because it is so damn undervalued.
But I need to remind over and over again - don't try to overconcentrate your portfolio until you are ready.
Here's some tell tale signs that you are not ready to concentrate your portfolio:
- You don't have a systematic way to invest, and invest based on gut feel or listening to gurus.
- You check the stock market price fluctuations for hours every day
- You lose sleep at night and constantly are worried about your positions
- You don't put more money into the stock market whenever there is a correction
- You think that keeping cash in the bank is safer than in investments
- You get overly emotional when your stock positions are in the red, and it distracts you at your work
The Bottom Line
The key idea is this.
How concentrated should your portfolio be really evolves together with your emotional muscle. While I have provided a general guideline on the percentages based on your portfolio size, you can always make adjustments to suit your emotional muscles at the moment.
At the end of the day, the key to building your wealth quickly is understand yourself and know what suits you the best. It is different for everyone.