Protect Yourself From Yourself

I became a full time microcap investor in late 2008, and about 18 months later my portfolio got the sh!t kicked out of it. When you make 100% of your income from capital gains it can get very stressful. You still have to pay healthcare, electric, mortgage, credit card, and other bills every month, so you have to sell something somewhere to pay those bills. You don’t notice it as much when things are going well, but when your portfolio goes through a bad stretch it magnifies things tremendously. This is also why there are so few full time microcap investors that simply manage their own money. Going from income to no income is a big mental hurdle, much bigger than you think.

My goal since my early twenties was to be a full time microcap investor, but it didn’t happen over night. You have to develop an investment philosophy-strategy, build your capital base, and even do some maturing (talk about this HERE). I also think it’s very important to have experience investing through a bear market. 2002-2009 were capital building years for me. I get asked quite a bit how much capital you need to make the leap to being a full time investor. It’s different for each person but it’s based off a realistic return rate during normal macro environment (if there is such a thing) plus some expectations of expenses. Or sometimes I answer it with: You are ready when you can mentally and financially handle your portfolio being down 50% and selling to pay bills. [Subsequent to this post, Mike and I produced: So You Want To Be A Full Time MicroCap Investor] 

So a year or so after I went full time, my portfolio takes a big hit and unfortunately I couldn’t blame it on the macro environment, it was my own dumb fault. My ego was my enemy, and I got cocky. I had drifted away from my investment strategy and invested in industries where I had no edge and had very limited knowledge of the industry. I didn’t even talk to management! For those that know me, you know that is a must for me. I had an eight-month stretch in 2011 where I was down close to 50%, several hundred thousand dollars.

At the pinnacle of all this I was getting married in the fall of 2011, so I was spending tens of thousands of dollars more than I normally would have. When your net worth gets slashed, you are trying not to think about it. My wife was making the wedding plans, and I was the CCW (Chief Check Writer). It didn’t matter that I lost another $40k in the market that week. I was not going to burden her with all of it. I just kept smiling..

“The super expensive platinum reception package makes total sense to me!”

“I wish we could spend even more money on flowers!”

As is often the case, you make your best decisions when your back is against the wall. There is no better educator or motivator than losing money. I eventually cut the losers, redeployed the capital into new ideas that fit my investment strategy and starting digging my way out of the hole.  Oh yeah, and I got married and lived happily ever after 🙂

First lesson, stick to your strategy. We all know that one.

The second lesson is really for full time investors. I wanted to start protecting myself from myself. I don’t mean protecting myself from bear markets but from my own ego.  When I was single it didn’t matter if I blew up my portfolio because it was just me.  I have dealt with that several times before when I was cutting my teeth in the early 2000’s, but now that I’m married and hopefully eventually having kids [edit: First child expected mid 2015], I don’t want them to have to deal with it.

So what does that mean?

When I have good years in the market I invest a percentage of proceeds into real assets and/or investments that will pay me an income. It could be real estate, land, or even ownerships in private companies. Preferably it is something that I could sell but not too easily. I know what I know and that is microcaps, but more importantly I know what I don’t know. I spend a fair bit of time networking and getting to know highly experienced professional investors in these other investments-asset classes. It’s taken some time to really find the “real” people that I can trust, but it’s well worth it. So I like to invest alongside experts in these respective fields.

This only makes sense for full time or established investors. If you are a new investor you can’t be sinking capital into such things. As referenced earlier, during my capital building years I was able to be invested in five different companies that would end up being 10 baggers. It took 3-5 years for each one to become a 10 bagger and I rode them. During this time I would have never sunk money into buying a house or similar things. I was trying to build capital as intelligently and quickly as possible. Owning a home, buying private companies, etc wouldn’t have fit that strategy.

A bulk of my income will always come from microcap investing, but now the worst case is I have some real assets I can fall back on and in some instances a passive income stream as well. In many ways it is good asset management to build wealth in other areas and expand your horizons a bit.

As you get older, things change, you stop thinking about yourself and start thinking about worst-case scenarios. You adapt your strategy to fit your circumstances. In my case I had to learn how to protect myself from myself.

If you enjoyed this article, read Getting Started, Getting There, and The First Million.

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