in Charlie Munger, ETFs, Fama-French, index funds, money, Nicholas Sleep, portfolio construction

I Need to Invest Money.

“I need to invest [some] money.”

That was a DM I got from a friend earlier this week.

As we got into it, it became more demanding and came with more context:

“Now tell me! Well I want something like ETFs, but still everything [in the stock markets] is going crazy!”

As she told me more and as I responded in kind, I got a chance to metaphorically shrug my shoulders.

I mean really … what do I know?!

But I thought about it and even without knowing her full context and time horizon, I pointed her to some research that if index funds were the appropriate route for her to take, that she should look to some way to best allocate across multiple low-cost, broadly/geographically diversified funds (based on the Fama-French 5-factor model.)

She looked at it briefly and said: “Sure. so [following this model portfolio is] like vaccines?”

I paused.

I paused until the next day. And after some thought, I’d thought I’d take it in a different direction using the same analogy she started.

Here’s my attempt:

“It [investing] is so very complicated.”

“But if we were to use analogies and taking your general theme we can try to craft something to explain. It’s not akin to the vaccine. It’s more like the measures one takes to prevent transmission. This pathogen [COVID-19] is invisible. You don’t know what it’s going to do and you have incomplete information.”

“But yet… you do it anyway. Masks do prevent things somewhat but only to the degree that you use them correctly and cover your nose, chin and mouth as much as possible and fully.”

“You wash your hands with soap and water for what 20 seconds? What does that even mean? Do you lather for 20 and then rinse for 10? Does it have to be warm? How warm is warm?”

“What if you had hand lotion on your hands prior? How much more should I lather?”

“What kind of mask do I use? Triple layer now? I should double up, is that right?!”

“I don’t know really, but that’s the point. When you think about it, it has less to do with the actual virus and more to do with knowing what to do and how one compiles with it or not. And also the barrage of incomplete, sometimes contradictory information … well that’s like the equity markets.”

“Buying an ETF is like someone telling you to wear a mask and wash your hands. That’s kind of obvious. It’s all the other stuff that is hard.”

“For that matter, if ever someone were to come to you touting they have the “vaccine” of the equity markets, you should run the other way.”

I’m pretty sure that I still don’t know anything and that no one knows anything more than anyone else. (“It’s tough to make predictions, especially about the future.”)

Like Nick Sleep and Charlie Munger says: there’s only very few things you can possibly know for damn sure. After all, it’s not the things you don’t know that kills you, it’s the things you know for sure that’s wrong.

Then she asked, “What’s a ‘vaccine’ of equity markets?”

I paused…