Regular reader Craig wrote in with the following cool question:
How does one invest for a potential depression (total economic collapse) without creating a situation in which your financial future only profits if that happens? I jokingly tell people if we see the dollar fold, you’ll wish you had shotguns and canned goods instead of gold or silver. But if you truly thought it was going to happen and went out and bought that stuff, you’re great if it happens…but not great if it doesn’t.
Interesting question, right?
How do we prepare for really, really, really bad outcomes?
I have a few ideas. But I’m curious what you think, so make sure to Comment at the end of the post!
Idea #1: Could You Collect?
Let’s replace “society kicking the bucket” with “an asteroid hits Earth and blows us to smithereens.”
If someone offered me 1 trillion to 1 odds of an asteroid hitting Earth, I would not take the bet.
Why not? Let’s talk through the outcomes.
Outcome 1: An asteroid never comes and I lose the bet. I lose my dollar.
Outcome 2: An asteroid comes and hits Earth. The sky turns to fire. My asteroid bookie is crisped into bacon and launched into low-earth orbit. I’m bacon too. Needless to say, I’m not in a state to collect my $1 trillion winnings.
Get it? Some bets aren’t worth taking because it’s hard—if not impossible—to collect on them.
If you think it can’t happen, think again. Well…not about the asteroid. About the possibility of not collecting on a big pessimistic bet! We saw this exact thing happen during the 2008 Great Financial Crisis.
People made “winning” bets—they shorted the housing market. But they almost weren’t able to collect their winning bets.
Why? Because the banking industry was crumbling. Banks were unable to make good on the billions that they owed.
If you’ve seen the movie “The Big Short,” there’s a scene where Brad Pitt’s character is sitting in an English Pub, trying to sell the rights to his team’s winning bets. Pitt’s team is owed $200 million. But because there was that question—would the bets ever be wholly paid out? or would the banks collapse first?—Pitt sold his team’s bets for only $80 million, or 40 cents on the dollar.
Why sell a dollar for forty cents? Because one potential outcome was that the dollar would never come. They smartly realized that $80 million was better than zero.
(NSFW language warning)
Lesson: A wager is only as good as the strength of the casino.
Idea #2: Do You Want to Live in That World?
Let’s step back from the apocalyptic into the mere dystopian. What if society sinks into The Dark Ages 2.0?
I’m reminded of the saying, “In the land of the blind, the one-eyed man is king.”
It’s good to be the king. But do you want to live in the land of the blind? Do you want to have only one eye?
In other words: do you want to live in a society where shorting society paid off?
It’s a similar question worth asking to bunker people. You know—those guys who build an underground concrete bunker to survive Armegeddon for 5 years?
Nice work. Your bunker kept you alive! So you’ll re-emerge into the burnt landscape post-Armegeddon…and then what?
Do you want to live in whatever world is leftover for you? It’s a question worth asking yourself.
Your bet has paid off! …Now what?
Idea #3: Are You Biking With The Brakes On?
Instead of betting for/against “society,” let’s substitute in a tangible company—Tesla—in place of “society.” Let’s ask: if you bet lots of money on Tesla, should you also bet some money against Tesla?
In short: no—don’t do that.
It’s like riding your bike with brakes partially squeezed. You’re competing against yourself. You’re wearing down the brakes. Just release the brakes and get to your destination faster.
If you’re worried that you’re biking too quickly…just pedal slowly. Nothing wrong with that. Then use your newfound extra energy in another way. It makes no sense to pedal hard while also applying the brakes.
Back to investing. If you’re worried that you’re too pro-Tesla, then sell some Tesla and diversify those dollars. Don’t short Tesla. That’s the wrong solution. Don’t have your dollars compete against one another on the same axis (pro-Tesla vs. anti-Tesla).
Instead, find alternative axes on which they can compete (e.g. a different company, a different asset, etc).
If you’re worried that your investment dollars are too “pro-society,” my suggestion is to get more specific with your concerns. What specific industries, countries, companies etc. are you worried about?
Bet against specific concerns is ok. But betting against society is a foolish wager.
This is the End…
This is the end…of the article.
I don’t think it makes sense to short society. It probably won’t work out for you. If it does work out, your riches will be a poor consolation. And in the meantime, your best investments will be dragged down by your pessimistic bets.
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-Jesse
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Great points. I always laugh at the gold hoarders. Generally what they have isn’t actual gold but some kind of electronic paper that says they have gold. Good luck collecting on that when the economy collapses.
Even gold itself isn’t going to be worth more than food, water, shelter, guns, ammo and a large dog when the apocalypse comes.
Excellent points. Thanks for writing in, JJJ.
You have a pound of gold.
I have a year’s worth of food.
Am I going to want to trade with you? I don’t know.
It really depends on if our post-apocalyptic society is at least congealed enough to accept gold as a medium of exchange.
The whole premise is morbidly fun to consider. But idk if gold is a solution 🙂
Yeah I’m against shorting in general not as much from a philosophical standpoint as you have here, but from the financial standpoint of:
1) Unlimited downside
2) Limited upside
Not to mention the interest rates on short positions are very expensive. If one’d like to hedge against a postiion, I think they can either sell some shares so rebalance their portfolio, or get some puts to hedge if you really don’t want to get rid of the position.
I don’t think there’s anything inherently wrong with profiting from downside, but mathematically speaking it seems very unlikely to be a good strategy in the long term as the market’s biased towards going up in general.
Good points on making bets against yourself or on a bet that you might never collect.
For investing, I believe putting money in a diversified all market index ETF covers all your bases and will self-clean as new winners are added and losers are removed.
For the end of the world stuff, gathering knowledge, useful skills and being able to be flexible/adaptable are the best investments. I have watched way to much of the “Walking Dead” fictional TV series and from that it doesn’t seem like anyone building bunkers or preparing end up surviving very long. It’s the ones which are able to adapt quickly.
Hey Tech! Agreed on both points!
I too am a big fan of a diversified portfolio, and skills are important too…though I’m not sure how sharp my “end of the world” skills are 🙂