Four Minus One Equals Zero

Even if you don’t appreciate math you probably think there is something wrong with my arithmetic.  Four minus one is three, not zero.  Everyone knows that.  But give me two minutes and I will demonstrate I’m right.

Specifically, I will show you how your entire profit from four excellent financial investments can be wiped out by a single loss.

Suppose you have a one hundred dollar bill free and clear from the shackles of rent, food, transportation, or insurance (you do like fantasy, don’t you?).  You’ve thought long and hard and have decided it’s better to have your money work for you than for you to work for your money.  So you resolve to invest.

You want to invest carefully because you don’t want to lose your money, so you decide to convert your one hundred dollar bill into five twenty dollar bills (check out my math on this). Then you invest twenty dollars in five separate investments.

You can invest in whatever you like.  Your daughter or son’s lawn mowing business would be fine.  Your friend’s expedition to Las Vegas, maybe not so fine.  If you decide to invest in the stock market I suggest you check with me first because my timing there has been terrible for years.  (Hint:  I’m not invested in the stock market right now.)

What annual rate of return should you expect?  In general, I would say that ten percent is not unreasonable. That is two dollars profit every year on a twenty dollar investment,

But let’s assume you are an extraordinary investor, or just plain lucky, and on four of your twenty dollar investments you actually earn a fifteen percent return.  That’s twelve dollars in profit on eighty dollars invested.  Fifteen percent! Good for you!  You might be tempted to reinvest your twelve dollars, along with the original eighty, for even more profit next year, but the concept of compound interest is a topic for a future blog.

To summarize so far – you now have four profitable investments, and twelve dollars more than you started with.

But, alas, your judgment, or luck, or pizazz, ran out on your fifth investment and – handkerchief please – you lost twelve dollars. From the original twenty you only have eight dollars left.  That’s depressing.  And it happens all the time.  Even to me.  Even when I invest with a reputable money manager.  Stuff happens.

But when you subtract your twelve dollar loss from your twelve dollar profit, what are you left with?  Nothing.  That’s the zero.  So four (profits) minus one (loss) equals zero.

Do I suggest that instead of investing you spend your hundred dollars on wine, weekends, and whack-a-mole?  That’s entirely up to you.

But I do suggest that if you do invest you consider being careful, because one large loss can wipe out all, or more than all, of your profit.

The same idea applies equally to other areas of your life.  I have been known to occasionally drive a little faster than the speed limit.  My profit was the time I saved in transit.  But three time over the years my entire time-profit was erased when another driver unexpectedly turned left in front of me.  The time I spent in the emergency room and in arranging for body work for my car was much greater than the few minutes I saved on all of my other driving trips put together.

Four minus one equals zero.  So be careful with your investments and, especially, when you drive.

Alan