July 07th, 2022

 Well, the new Thor movie is out, in case you missed it.  In celebration of Marvel’s five-thousandth contribution (or is it more?) to the cinematic world, I thought we might take just a minute to think about what makes for a good super hero.
 
To be certain, there is a whole range of standard cool powers out there, nowadays.  Since the earliest origins back in the age of mythology, the typical menu offerings are now well-established.  Sort of like the Tex-Mex joints you can find everywhere, from big cities to small towns.  Just as there’s no rarity to steak quesadillas or enchiladas with red sauce, flight, teleportation and blasts of energy are there to be found most anyplace you look.
 
But back at the basic level, it strikes me that the three characteristics which seem to underlie all the rest are speed, strength and an ability to withstand damage.  If you have just those three, even if you can’t shape shift or move objects with you mind, you still end up being pretty formidable.
 
Take The Flash, for instance.  Obviously he’s got the speed.  That’s his thing, after all.  But he also has strength, by virtue of that formula from your old science book that you nearly forgot:  Force = Mass x Acceleration.  If you have plenty of acceleration – as does The Flash – then you can also get up to plenty of force.  And since his metabolism is sped up too, he heals faster.  So damage can’t accumulate in the same way it would without that ability.
 
Fast, strong and hard to hurt.
 
Superman?  Yes, yes, there’s flight and heat vision and super-cool breath and the overall relentless do-gooder vibe.  But underneath all of that more obvious, snazzy stuff?  Same three.
 
Well, what does that tell us about ideals to pursue in arranging our capital?
 
One of the under-discussed, important topics in investment management is capital efficiency, or the speed with which one moves from this investment to that one.  If you get ready to sell a rental house after the tenant moves out, even if they leave a substantial mess and a list of repairs, you can probably turn the thing in about three weeks with the right crew and the ability to focus.  So if it ends up taking three or four months to get it physically squared away and sold, that’s an example of a not-efficient transition.  Your capital sat idle, not earning anything, for a couple of months when it didn’t need to. 
 
When one investment has run its course and it’s time to move to the next one, the smaller the delay, the greater your long-term, overall rate of return at the portfolio level.  When it’s time to move, there is benefit in moving instead of putting it off.
 
On the strength front, any time folks start talking about earning high returns, the conversation routinely gets swept off to the side and morphs into a set of admonitions about watching out for risk.  Don’t let all that star dust you’re hoping for blind you to the possibility of losses.  Frankly, I’m as bad about doing that as anyone out there.
 
Yet, high returns, strong financial performance, carry a lot of importance.  Big results are great when you can get them, no doubt about it.  After all, in a sense, isn’t earning a bunch of extra money one of the best ways you can think of to decrease the risk of eventual financial failure or collapse? 
 
Investments which powerfully deliver what they are supposed to –and maybe a bit more – year after year are the foundation of a lot of the wealth you will eventually come to have.  So picking things which have good prospects, even knowing that some of them won’t pan out as hoped-for, is still a better strategy than thoughtlessly loading up on every remote possibility that comes your way, on the long-shot chance that maybe something will turn out well.  If you are not intentionally pursuing returns with your investment choices, you’re sort of missing the point of the whole exercise; even if returns aren’t the only important thing to think about.
 
Which is a nice transition into our final topic.  Diversification is universally understood to be the thing you do to be able to absorb some hits without getting knocked out.  Though there are a lot fewer people out there who really get the mechanics of how to put the principle into action.  Two simple keys will get you pretty far down the road, though.
 
First, is the basic notion that you don’t want a particular kind of negative event to lead to a decrease in all of your holdings simultaneously.  This is relatively easy to address:  if all of your holdings are in one kind of asset, AND it’s a type of asset that is susceptible to big swings (stocks, real estate, closely-held business, etc), cut it out.  Move some of your money into something else.
 
The second point is a bit more nuanced.  Although you would like to avoid down-turns altogether, you may not be able to.  Especially if you are still in the part of the cycle where you are building wealth (versus late in life, and living off of the income and wind-down of capital which was made decades before), it’s more likely than not that some of them will come your way from time to time.  So if there is a certain inevitability to such events, the question is how best to cope with them.  The answer:  as you approach the transition to the retirement income years, don’t end up in a position where you will have to liquidate a depressed asset to meet current cash/income needs. 
 
Take the stock market for example.  There have been lots of times throughout the years that it suffered a significant drop in value.  But in all past instances, not counting the one we are currently living through, it has eventually recovered to previous levels.  It just took it awhile to do so.
 
During the recovery period, people still had bills to pay.  Those who had their capital arranged so that they could leave the stocks alone to recover, and draw their cash for income from other holdings, eventually saw their stocks return to former values. 
 
But those who did not have other pools of money available and had to sell their depressed stocks did not participate in the recovery.  They left the market before it rose again, and what was a temporary aggravation for our first investor, was a permanent loss for them.  Same market decline, same market recovery, vastly different levels of damage.
 
Our first investor, in other words, was harder to hurt because of an understanding that a major aspect of diversification is the existence of multiple options within the broader portfolio for how to create liquidity.  Steps in the past made it so that in the present he wasn’t stuck doing something he obviously didn’t want to do (i.e. realize the discount).
 
So there you have it.  Want to take a page from the super hero playbook?  Focus first on the big three: fast, strong and hard to hurt.  Then, once you’ve got that squared away, if you want to start learning how to talk to fish, or change the weather, fire away.