The Poor Man's Child Strategy for Investment.
"The poor people back in my country, they have a lot of kids. They do it in the hope that at least one of them will be successful and help the rest of the family out of poverty"
I laughed at my friend's absurd theory, ready to counter it with the argument that the chance of that happening is extremely low and on the other hand the poor man was just going to increase his expenses by having more mouths to feed.
But a realisation struck me. I have invested small sums of money in various penny stocks and worthless cryptocurrencies in the hope that one day at least one of them will be a multi-bagger and I'll be a millionaire. And I knew many others who had done the same.
How is it possible that the same strategy is being employed by a poor illiterate man who probably has not even seen the gates of a university and people with advanced degrees to get rich?
Is the poor man's child strategy something that can work in investment?
Let's take a look at this from the perspective of probability.
Suppose there is a country with 1000 people which has a newly opened university that can admit 10 people. For the sake of simplicity let's assume that the definition of success is getting into the university and if one person from a family is successful the whole family is considered successful also that anyone in the country can apply to get in. So any random person in the country has a 1% chance of being successful. A family of 4 has a 4% chance of being successful. If it is a family of say 10 people they have a 10% chance of being successful.
Moving on to the investment side of things. Assume there are a total of 1000 different investment instruments including stocks, cryptocurrencies etc., There is a chance that at least one of them will be a multi-bagger and give a return of say 100000% over the next few years. But you neither have the time nor the skills required to do any significant research. And the total amount you have is fixed, say 100 GBP. So you can either buy one stock which costs 100 GBP or 10 different stocks costing 10 GBP each. Simple probability dictates that you choose 10 cheap stocks to increase your chances 10 fold.
However, anyone with a basic understanding of the world knows that in both cases the choice to go with more to improve chances is nothing but utter stupidity. Because in the real world, the probability of each occurrence has numerous direct and indirect factors associated with it.
It is better to have one or two children and give them the best you can rather than stretching your resources thin among say 8. Similarly, it makes a lot more sense to study the instruments you plan on investing in and then choose the best few to invest in.
So should we avoid investing in Cryptocurrencies? NO!
What I propose is a strategy that has been proposed before by some people on various platforms including YouTube. For now, the best strategy is to invest in a 90:10 ratio.
Invest 90 per cent (at least 85 per cent) of your total portfolio in well-researched stocks or indices with good fundamentals and more than a decent chance of consistent returns over the years. And 10 per cent (not more than 15) of your portfolio in one or more cryptocurrencies or meme stocks.
In this case even if the crypto or meme stocks you invested in goes bust, the well-researched part of your portfolio will cover it up in the long run. On the other hand, if by some insane chance, the crypto or meme stocks reach the moon, Congratulations and welcome to the world of Apes.