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Investing for immortals
Some time ago, when I started my project on disproving Cassandras, a reader suggested I should do a post on investing for immortals. This was triggered by the prediction of one futurist that by 2030, nanobots will help humans become immortal. I doubt that humans will become immortal by then, but the question is an interesting one to ponder. So here we go.
The investment community has thought about ultra-long-term investing for a long time. Endowments and Sovereign Wealth Funds have an expected life of hundreds of years, so for them, intergenerational investing is a real issue. And the solutions we have come up with are things like the Endowment Portfolio that makes use of the risk premia achievable in alternative and illiquid asset classes. Other famous approaches are Harry Browne’s Permanent Portfolio and the All-Weather Portfolio of Bridgewater.
But let’s assume I was immortal. How would I go about constructing an investment portfolio?
Most importantly, I would go back to first principles wherever possible. And the most important one of them is to not make forecasts – or to make only very limited forecasts.
Think about how bad our forecasts are for the near future. Now think about how badly wrong we are going to be in the long run if these small mistakes don’t cancel out but accumulate and reinforce them. Thin back 100 or 1,000 years and the world people lived in then. For them, our world today would have been completely unfathomable. Similarly, it is impossible to forecast how our world will look like in 100 or 1,000 years. Whatever forecast we make is going to be way off, which is why I have made it a habit to ignore futurists and their predictions.
Yet, the task we have is to figure out how to invest for that time frame.
And this is where the Copernican Principle comes in. I have written a post explaining this really important but not well-known concept in some detail. But the short version is that if you want to know how long something will be around before it ceases to exist, a good starting point is to assume that you are witnessing it at a random point in time. You are much less likely to encounter something at the beginning of your life or at the end of your life than somewhere in the middle. In other words, you are not special in the sense that right now, right here, you witness the beginning of a new era (say with cryptocurrencies as a new form of money that will replace all other forms of money in the future) or the end of an era (say with the end of economic progress and the beginning of a no growth world).
If you think through all that (and in the article linked above I do just that) you find that things that have been around for a very long time are much more likely to be around for much longer into the distant future than things that only have been around for a few years or decades.
Combining the Copernican Principle with only very defensive forecasts leads me to the following guiding principles for my investments:
Bet on humans being humans. Any investment that exploits behavioural biases and mental shortcuts is likely to work not just today and tomorrow but as long as humans are around. Yes, it is possible that technologies will make us more rational over time or eliminate the influence of human biases but even with AI, it seems that it is exhibiting similar biases as humans do.
The two investment techniques that I think are almost entirely based on exploiting human biases to their advantage are momentum investing and value investing. Coincidentally, these are also the two investment styles that seem to be much more robust against data mining than all the other factors that have been described. Yes, there is increasing evidence that value investing does not work in a low interest rate world or has stopped working for some other reason, but because I want to be very defensive, I will give value the benefit of the doubt and use value and momentum as my two ways to manage the portfolio. I think momentum is going to work because people will always be greedy and try to jump onto investments that have gone up in the past, hoping that they will continue to go up in the future. And value is going to work because when assets have been dropping in value a lot, most people will be fearful of these assets, providing opportunities to investors willing to pick up good investments at bargain prices.
Next, I will rely on the forecast that technological progress will never stop. No matter what problem we face, humans will find a solution. That, in my view, is a pretty easy forecast to make because if we ever encounter an existential problem that we can’t solve then – well – so much for immortality. Thus, I am not going to invest for a world after the nuclear holocaust or a world where we won’t find a way to cope with climate change, or where AI kills us all. That would be pointless. Instead, I assume that being immortal implies that I am not going to die of natural causes, but it is still possible to kill me by shooting me with a gun.
But if I believe in technological progress to continue, then I want to invest in human creativity which is the driving force behind technological progress. And the simplest (and in my view best) way to do that is to invest in businesses. Hence, I do want to invest in listed equity and private equity. This way, I become a part owner of the business and benefit from the ingenuity of the people who work at these businesses and solve the challenges of the day.
Third, I want to invest in stuff that I can use as a medium of exchange that is liquid and relatively safe. Being immortal does not mean that I will be alone. I will always have to rely on other people to get food, shelter, and other stuff. So, I need ‘money’ and liquid assets I can tap into whenever there is an unexpected need for cash.
This one is where the Copernican Principle helps a lot. The longest existing forms of ‘money’ are gold and cash issued by governments. So, I want to hold a diversified collection of gold and a variety of cash in different currencies. But because I have no idea if the Dollar or gold will survive or the Chinese Renminbi, etc. I will simply make no forecast on any specific form of money and hold each in equal measure.
And I think that’s about it.
In the end, it seems I would essentially invest in listed equity, private equity, and ‘cash’. And because I cannot predict which one is going to perform better or worse, I would put the same amount of money in each of these three buckets. Within equities, I would probably split it 50/50 into a value and a momentum portfolio and within each of these portfolios, I would hold equal amounts in each stock. Within private equity, I would invest in as many different businesses as I can and put the same amount of money in each investment, just like I would put the same amount of money into each currency and gold.
But some investments would not be part of my portfolio for immortals: bonds, real estate, hedge funds, art, crypto, etc.
The reason for all of these is pretty much the same. I don’t know if they will still be around in a couple of hundred or thousand years. We might no longer need houses or buildings to live in and all forms of bonds and loans may long have been eaten by inflation or abolished in favour of other forms of financing. And crypto? Well, come back in a couple of thousand years to discuss that.