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Lessons From a(nother) Fund Collapse

I saw this story over at Josh Brown’s site about an “apple only hedge fund” that has apparently imploded.  These sorts of stories are nothing new, but it does get frustrating to see how people keep falling for these sorts of investment schemes.  And yes, they are schemes because they can’t deliver what they promise.  This doesn’t mean the fund manager is always a bad person or that they have malicious intent, but it often means they don’t have a sound understanding of portfolio construction or they don’t fully understand the role that savings/investment plays in your life.

I try to teach people who work with me through Orcam that their savings is not a replacement for their primary income source.  In other words, the savings you generate from your primary source of income is a repository.  You can gamble with it.  You can blow it all on booze and women/men if you want.  But like most of us, you need to protect it.  But too many people reach.  They get greedy with these funds.  Or they fall for the usual Wall Street sales pitch that they can/should beat Warren Buffett.  You know, if you don’t “beat the market” you’re a loser.  The truth is, most of us don’t need to “beat the market”.  We need to max out our primary income source and protect the savings repository in a manner that achieves one thing:

  • We need to allocate our savings in a manner that protects us from the loss of purchasing power and the risk of permanent loss in a manner that is consistent with positive risk-adjusted returns.
I’ve discussed this in more detail in an Orcam research piece titled “The ‘Investment’ Myth”.   When you start reaching out on the risk curve with your savings in a scheme that isn’t truly “investing”, but is actually an allocation of savings, you become susceptible to putting too much of your savings at risk in the type of allocation that could cause severe personal hardship.  And most of us don’t realize that this “investment” is actually your life’s savings until too much of it is gone.

There’s a place for true “investment” in all of our lives.  Most of us only truly invest in ourselves and don’t actually invest in anything else (except maybe your kids or the people you love).  But understanding proper portfolio construction is all about understanding the difference between savings/investment and designing portfolios that don’t put you in front of the permanent loss steam roller….

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