Diary of a Money Manager, ep. 53
self-ensured
3.12.2025
Editor’s Note: The following is the prologue of an homage to The Intelligent Investor, available free of charge to all paid subscribers. Enjoy, James
Prologue: Nothing to Lose
Most wealthy people I know worry about three things: their kids, their future healthcare costs and their investment portfolio. Only one of these things is controllable.
The same was likely true in 1949, when a hugely successful Wall Street money manager named Benjamin Graham published a book encouraging what he called “laypersons” to take control of their investments. Because, as he put it, the hired guns in New York were more likely to do one another’s laundry than outperform the markets on their customers’ behalf. Financial advisors, Graham observed, were extremely professional and conscientious in their dealings with one another; not so much with their clients. Sadly this has been my experience and the experience of many, many friends and neighbors, even as fees for active money management have soared. Simply stated, the people you hire worry more about their fees than your returns—or even the safety of your capital. They are often salespeople first, advisors second (or third) and rarely fiduciaries.
Graham’s book sold over a million copies and later editions were edited by his protege Warren Buffett. While its message remains timely, the messaging has become dated. A lot of people lack the courage and confidence and patience to invest for themselves but many other simply can’t get through Graham’s prose and dated case studies. What follows is for my many friends and others who fall into the second group. Everyone else, stop reading now and buy an unweighted index fund or some AAA-rated corporate bonds or both but don’t believe that anyone knows something that you cannot.
Okay?
Now imagine that your health insurance sucks. You pay a premium every month, but it’s nearly impossible to get any benefit because your deductible is so high. Your money is going to pay other people, making some of them wealthy even, while clawing even a little of it back requires jumping through all kinds of hoops—and a lot of time. At the end of the day, you’d be very lucky to get back out what you put in. Why? The system is rigged and you’re kind of lazy. (This example works for other types of insurance—homeowner’s may be a better example if you don’t pay for health insurance yourself or if you’re old enough to use Medicare.)
At some point, the solution becomes obvious: insure yourself. But the idea of becoming your own insurance company just seems so fantastical and reckless. You need an epiphany: if institutional risk is being foisted on your individual shoulders anyway (and this is happening big time in the investing world also, more on that later) why not go all the way? Take it all.
But how?
Like a big insurance company, you will build up a surplus reserve. This will then pay out any “claims” to yourself, be it medical visits or home repairs. Obviously the most important thing is ensuring that there is sufficient money in the reserve—in other words that it grows faster than the cost of your future expenses. The first rule, then, is to not lose any of what you already have.
Which implies investing your surplus in bonds, but let’s not be all theoretical, that’s your financial advisor’s schtick. You live in the real world now, like that insurance company with all of those claims and shareholders. Thinking practically, you quickly realize that bonds pay relatively little and there is still the risk that inflation or raising interest rates will make those bonds worth less than they are worth right now, while there is very little chance that doctors and pharmaceuticals will charge less in the future. Suddenly owning shares of the companies that issue those bonds look safer, at leaset ones that produce a reliable amount of cash, after all they think that they are getting the best of the bondholders don’t they! Maybe you should be on their team. After all, that company can increase their prices and reinvest earnings, creating growth in excess of inflation.
But which companies to invest in? How can you beat those pros on Wall Street with their huge research departments staffed with attractive and ambitious Ivy League workhorses? Haven’t you just walked into the casino with everyone else, placing your bets on some random number, and against the house that never loses?
Not necessarily.
The gambler (or stock picker in this instance) assumes that the market price for every company is an accurate reflection of its value, indeed that price and value are one and the same. Therefore they will choose the company with the best growth prospects or the highest dividend. In younger days, you tried your hand at this game only to see the hot stock you chose go up and then right back down. It turns out that growth prospects are remarkably subjective and you’re terrible at prognosticating! And while you were gambling in the market that insurance company was employing a different technique with your hard-earned money. Their old and unattractive underwriters created a pool of customers with the lowest possible risk, maybe by excluding smokers or people with certain jobs or pre-existing conditions for example, then they hiked their deductibles as high as possible. In other words, the insurance company assumed the role of the bookmaker and not the gambler.
What if you could do the same? Instead of creating a portfolio like everyone else, why not build a risk pool with a high margin of safety?
Now that you’ve put your health (and maybe your house) on the line you really have no choice. As your high school math teacher may have once admonished, it takes a hundred percent return to get back to even after a 50% loss. In other words, you could achieve better than a 7% return every year for a decade—far more than a AAA-rated corporate bond—only to lose all of those gains if the market crashes or if you screw up a single portfolio or, most likely, you panic because you believe, like your advisor, that price and value are the same thing.
If this seems daunting, try not to remember that your returns must be greater than the rate of inflation, otherwise your purchasing power will shrink, which is still a loss. But do understand that you are allowed no moonshots or hot growth stocks or anything that can’t be easily liquidated in case you make a mistake. Also know that when you figure out how to invest, you can apply it to all of your wealth, not just your surplus fund. After all, if the insurance company has grown into a financial behemoth by compounding its profits decade after decade, if its shareholders have become rich by avoiding losses rather than forecasting gains, isn’t that what you’d like to achieve for your future self?
The answer becomes clear as soon as you realize that you have no choice, but first you may have to have a number of popularized misconceptions removed. Which is where we happen to be going.
One last point, just to end this on a positive note. You don’t know it yet, but you already possess three big advantages over that big insurance company. One, you can negotiate future expenses yourself. Two, you aren’t required to cover other people’s losses. And three, you can buy the best investments, regardless of size or geography. Yes, it will take some work and a lot of discipline but maybe less than you think…
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