Shotgun Money Investing vs Ruthless Charlie Munger Sniper Wisdom

You’ve money but don’t know what to do, Diversify— Otherwise don’t

One thing you learn in finance is to make an optimal investment portfolio based on Markowitz Theory. The guy won a Nobel Prize for that, which tells you how complicated and important the topic is.

An optimal investment portfolio is an efficient set of assets that gives you the maximum possible profit (return) for the risk you are taking. This is cool because you get to earn the most with your specific level of risk.

In other words, many people are indeed earning at the level you earn but they are risking more. Thus, they are not efficient, they are not optimal. They are not using your shotgun investment strategy.

Charlie Munger Ruthless Wisdom

I remember when I was surprised by the wisdom of Charlie Munger who explained diversification is for those who don't know what they are doing.

You can imagine my surprise because diversification is the big idea behind portfolio investment.

In fact, you are my witness that everybody giving finance tips will tell you about diversification. It’s like a requisite for any finance guru. Like a Boyscout badge, or a rite of passage from self-help boy to money guru.

Diversify, diversify, diversify

The basic idea behind diversification is that while some companies are booming, others struggle, and some almost always do well.

This happens because they are in different industries, their business cycle behaves differently each month, and many more reasons like the product, service, markets, economy, etc.

What diversification does is pick percentages of assets (stocks) until it has invested the 100% of money destined for that portfolio.

Diversification ensures a mix of profits that results in you earning a steady return. When some companies are earning little others are earning tons. They compensate each other so you always earn.

Cool, right?

Not for Charlie Munger.

“Diversification Is for Those Who Don’t Know What They Are Doing,” Charlie Munger Said

As I was telling you, it was a total surprise what Charlie Munger said, because I hadn’t thought that way before. And I love when those moments happen.

As Charlie was explaining, a domino effect started in my brain. It was a chain reaction where every bit of money knowledge was a domino piece. All the pieces were rearranged one way or another. Sublime.

It’s quite simple but not.

It’s one of those things that require a genius to simplify something complex. When you see the simple answer you feel tempted to think it’s not a great feat because the answer isn't complex but it’s the total opposite.

Then, why did Charlie Munger say that diversification Is for those who don’t know what they are doing?

Sniper Investing

Well, when you think about people who became absurdly rich, aka Billionaires, you see that:

• Bill Gates worked solely on making Microsoft the software empire it is.
• Jeff Bezos's dedication to Amazon is a thing to marvel at.
• Elon Musk is invested in Tesla, SpaceX, Neuralink, Open AI, and The Boring Company.

Do you see the pattern?

These guys got so high skyrocketing profits that they topped the richest world lists.

But they didn’t diversify, they focused, they concentrated on one shot, and they one-shotted their Billionaire status like badasses snipers.

That by no means can be called diversification.

Bill Gates became a Billionaire because of Microsoft, and Jeff Bezos because of Amazon. Not even an attempt to diversify here.

Even in the case of Elon Musk all of his businesses are in the technology industry, and all are concentrated on him leading those companies to success. Everything is concentrated around him, around his vision of the future. And you have to remember that he got into the big-money world stage after creating and selling Paypal, again, one thing not diversifying.

The point is that these guys didn’t become rich because of an optimal and efficient investment portfolio.

Elon Musk, Bill Gates, and Jeff Bezos didn’t apply matrix math, mean-variance, covariance, standard deviations, and optimization algorithms to find the exact percentages of each stock in the market they needed to diversify their investment portfolio. No, they focused.

Elon Musk, Bill Gates, and Jeff Bezos didn’t become Billionaires by diversifying but by concentrating.

They didn’t diversify to become Billionaires. They had a vision, and they concentrated everything on such vision because they knew what they were doing. They were snipers aiming for the head, one bullet, one hit, no diversifying.

If you got money and you don’t know what you’re doing, then diversify. It’s wise. Diversifying is like a Shotgun, even with no vision and a bad aim you will hit something.

Shotgun Investing

The Wisdom Charlie Munger's words contain has subtle gold nuggets you can miss. For example, relative risk, he didn’t say it explicitly but between lines.

Relative risk

This isn’t Einstein's relativity theory but shares the same spirit.

It’s true that putting all your investing money in one asset is riskier than a diversified portfolio. But if you actually know your stuff, and you are one of the more knowledgeable people about that specific asset your relative risk is low but for an outsider is prohibitively high.

You don’t have to be the leading world authority in such an asset but you have to understand why the startup or stock you are investing in will succeed. You have to know, which is different to bet.

But this is relative because you have to be self-aware that you are not delusional about that one asset succeeding. This is tough because when you want something to work you talk yourself into believing it will happen.

Thus the relative risk is low if you are the real deal about knowing what you are doing, knowing what you are doing, isn’t going all in, and expect that because you want it so much it will come true with the complicit universe's help.

Shotgun Investing

Shotgun investing is diversifying because you aim for everything in a higher or less percentage but mostly everything.

This is more evident in Index Funds and ETFs, they differ in how fast you can trade them (liquidity), costs, and other financial caveats but the important aspect is that they resemble the indexes they follow.

For example, an S&P 500 Index Fund or ETF mimics the composition of the index itself. This means if you invest money in them is like you are investing in the top 500 U.S. companies by market cap.

The same is true for the Dow Jones Industrial Average (DJIA), also known as Dow 30, which consists of 30 large publicly-traded U.S. companies. So if you invest in an Index Fund or ETF of the Dow 30 is like investing in those 30 companies at the same time.

Final Showdown: Shotgun Investing vs Sniper Investing

The best thing you could do is relative to yourself.

If for some reason you happen to gain a sudden big fat bank account, because of the lottery, inheritance, a one-time profitable transaction, or you got lucky with Bitcoin, Crypto, and NFT the shotgun investing strategy is more likely to work for you because you gained the money in a sudden way, it happened to you rather than you made it happen.

Don’t feel bad about it, feel happy, even blessed if you want, admitting that your money came to you by external forces and not your actions it’s wise because then you can take action to not burn your money as I write in the article You’ll Burn Your Money If You Try to Earn It like Warren Buffet.

Why shotgun investing is better in the previous situations?

Because when investing in a diversified portfolio you avoid the burden of knowing what you are doing, you surf the waves of the economy ocean all along.

For example, if you invest in an index fund or ETF tied to a whole economy like the S&P 500 and the Dow Jones Industrial Average (DJIA), it means in a simplified way that you are investing in the whole USA economy.

Pay attention to the cycle of the economy, are we in a recession or business are booming? The basic idea is to invest when everything is cheap in the financial markets. You will notice this when people are freaking out thinking the end of the world is coming, then wait to eventually make your profits when the economy recovers.

This is why it is considered a long-term passive strategy because you simply take a ride from the economy itself without fancy knotty complex strategies or trying to be the smartest guy in the room. Which I find very attractive if you have money but not investing skills.

Don try to be a genius or impress the people around you by making bold investing moves because when you lose everything playing to be Indiana Jones or James Bond you’ll be alone.

Remember you’ll always have people around you telling you how massive cash-grabbing opportunities you’re missing, they will make so much money for you, you just have to handle your money to them. Never forget that being brave, bold, and a risk-taker comes easy when it’s not your money.

Now, let's talk with you sniper investor.

There’s not much I can tell you because you know your stuff. You’re astonishingly intelligent, insightful, and self-aware.

You already know this, don’t you?

You belong to a global minority and your species shapes the world. You are one of the few beyond 3 positive standard deviations who is balanced enough to not be considered crazy.

You don’t need to be Elon Musk to be in this category, you can be a successful businesswoman or man in your country, or your local community.

Actually, you could be of no profession chilling on a beach, park, or living room enjoying life because at the end of the day you pondered money vs life and chose the latter and because you are crafty enough you are never in need of money.

In that case, what I can tell you is to take care of your mental and physical health, and surround yourself with people who love you because everything necessary to success revolves around your well-being just like Elon Musk.

Whether you are a shotgun investor or a sniper investor always consult a financial planner or a tax advisor for detailed information.

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Note: The information contained in this story is subject to change and doesn't constitute legal or financial advice. Always consult a financial planner or a tax advisor for detailed information.