Invest in public markets

- In a recession, investing in the stock market and other assets can be a very attractive proposition because stock prices usually fall sharply during recessions and stocks can appear to be on sale at bargain basement prices. But before you go out and start investing in stocks like Amazon, Apple, or Disney, keep a few very basic principles in mind. First, don't invest money you can't afford to lose. That's true whether you're investing in the stock market or in your own business. Don't take out a second mortgage to make investments. Don't bet the house. The second thing to know is that you should only invest in things that you understand. Don't buy complicated financial instruments or make investments that you don't. Remember that whatever you're investing in, you're competing with folks who do nothing all day long but study the ins and outs of that market. There's a lot of risk to investing, and let me explain why with an analogy called the monkey line. You see, there's something called the infinite monkey theorem, which says that if you put 100 monkeys in a room with 100 typewriters and you wait long enough, they will type Hamlet. Apparently a few years ago, some university tried it, but they didn't get a single line of Shakespeare. Dumb monkeys. But if you put those same monkeys in a room with two big buttons, one that says buy and one that says sell, they could trade in financial markets, and they would likely perform better than the average person. Let's imagine that you've hired a monkey to make all your investment decisions. A monkey has no idea what he's doing. He doesn't even know what the stock market is. He's just hitting those buttons randomly. And when he hits the button that says buy, you buy a share, and when he hits the button that says sell, you sell it. Sometimes the monkey gets lucky and hits buy or sell at just the right time and you make a bunch of money. You can expect the monkey to be right 50% of the time. That's the monkey line, the amount of money you'd make from the stock market if you make decisions completely at random with zero information. An investor wants to be above the monkey line and wants to avoid at all costs being below the monkey line. In this graph, you can see the monkey line as a horizontal line in the middle at the 50/50 break even point. The horizontal line at the bottom of the chart is information. The further to the right you get, the more information you have. The graph shows that if you know nothing about the stock market, if you make decisions like the monkey, then you'll be right at the monkey line, 50%. That makes sense. The graph also shows that if you're a really savvy investor with a lot of experience and knowledge, you'll be able to play the stock market and come out well above the monkey line, and that also makes sense. That means that you have a lot of information and so you're going to have above average returns. But if someone's above the average, and that's the folks with a lot of information, someone has to be below the average, and those are the people with only a little information. The funny, surprising part of the graph is this. If you know only a little about the stock market, you'll end up below the monkey line. You'll be worse off than if you had just hired that monkey. As the saying goes, a little knowledge is a dangerous thing. In a recession, investments may seem cheap, but only invest in things you understand, and if you can, diversify among those assets you understand. How well do you understand what you invest in?