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?
Letâs replace âsociety kicking the bucketâ with âan asteroid hits Earth and blows us to smithereens.â
If someone offered me 1 trillion to 1 odds of an asteroid hitting Earth, I would not take the bet.
Why not? Letâs 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. Iâm bacon too. Needless to say, Iâm not in a state to collect my $1 trillion winnings.
Get it? Some bets arenât worth taking because itâs hardâif not impossibleâto 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 werenât 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 youâve seen the movie âThe Big Short,â thereâs a scene where Brad Pittâs character is sitting in an English Pub, trying to sell the rights to his teamâs winning bets. Pitt’s team is owed $200 million. But because there was that questionâwould the bets ever be wholly paid out? or would the banks collapse first?âPitt sold his teamâs 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?
Letâs step back from the apocalyptic into the mere dystopian. What if society sinks into The Dark Ages 2.0?
Iâm reminded of the saying, âIn the land of the blind, the one-eyed man is king.â
Itâs 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?
Itâs a similar question worth asking to bunker people. You knowâthose 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-Armegeddonâ¦and then what?
Do you want to live in whatever world is leftover for you? Itâs 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,” letâs substitute in a tangible company—Tesla—in place of “society.” Letâs ask: if you bet lots of money on Tesla, should you also bet some moneyÂ againstÂ Tesla?
In short: noâdonât do that.
Itâs like riding your bike with brakes partially squeezed. Youâre competing against yourself. You’re wearing down the brakes. Just release the brakes and get to your destination faster.
If youâre worried that youâre biking too quicklyâ¦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. Donât 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 youâre worried that your investment dollars are too âpro-society,â 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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