How can I use volatility to improve my investment decisions?
When I read Taleb, I’m tempted to go for the big bet using options with skewed payoffs. I think the real lesson is more straightforward than using out-of-the-money options, which is good because I’m not trained in derivatives pricing!
I have a favorite game that I play with any purchase. Determine value before I find out price. In the context of real estate (or buying companies), value the asset before you find out the asking price.
In 2009, I saw a “for sale” sign come up in my neighborhood. I played my game and priced the property in my head. Unfortunately, the property was listed at 25% over my valuation. So nothing happened, I waited, watched the property and the sign came down.
In 2010, the sign came back up and I checked the price. It was listed at a 40% reduction. Yay! I immediately put in an offer slightly below listing price. The owner countered my offer and we agreed a deal that everyone was happy with.
In 2009, I followed my investment mantras:
- I don’t need to do a deal, I need to do a good deal
- Let volatility do its work and create a situation to buy at an attractive price
- My work is to build core capital, educate myself and be patient
My family needs one deal like the above per decade. Putting that in context, If the family is changing strategy more than one month in a hundred then we might be taking too much action. An “active” strategy would be anything that requires strategic change more than one month in fifty.
I don’t need advisers that earn fees when I take action. I need systems that prevent me from tinkering for no gain.
So the game is: deciding what I want, educating myself and waiting. Eventually, volatility will bring a great opportunity my way – at that point, I need to be willing to commit in size.
I tell my wife that was my strategy with our marriage – I also admit that I got lucky with her being better than I imagined. Elite swimmers have hidden options (loyalty, persistence, patience, internal motivation) and being OK with long term incremental progress.
To cope with the amount of “no action” inherent in the above strategy, I work on case studies, study history and, especially in relationships, improve myself.
One deal per decade.