Most people assume that financial traders take enormous bets in the marketplace. While there are individuals and companies that do take large financial risks, I worked for a large energy trading company and our trading philosophy was risk minimization. Our trading portfolio was highly diversified and contained hundreds of contracts that individually would not cause great negative financial harm to the company. The portfolio was designed towards maximization of optionality that minimized the financial risks.
The strategy was centered upon a trading business designed for long-term sustainability, not large short-term profits. It was developed within an international hydrocarbon business that existed for over 100 years. The energy trading business was integrated within a much larger energy business containing projects lasting for generations. This is why I was able to work 24 years for the same energy trading company and eventually retire. Our risk profile covered decades, not geared to maximize the quarterly results.
Morgan Housel, a business writer and partner at the Collaborative Fund, recently authored The Psychology of Money: Timeless Lessons on Wealth, Greed, and Happiness (Harriman House, Petersfield, UK, 2020). His audience is individual investors, not energy trading, but his writings touch upon basic philosophical (and financial) truths. “There is no reason to risk what you have and need for what you don’t have and don’t need.” (page 41) My first house was purchased in late 1981. It was a new starter home within a Houston suburb. Almost all our available cash went into the 5% down payment and the mortgage interest rate was over 13%. I refinanced the house after a few years to an adjustable loan and over the next 10 years, interest rates fortunately declined, which lowered the monthly payments. This enabled me to make additional principal payments. After 13 years, I paid off the mortgage and owned the home outright. It was a delight to burn the mortgage document and be debt free.
Why did I pay off the mortgage early? I could have invested the extra money into stock investments or spent the money on material purchases. I paid off the mortgage because it gave me ‘piece of mind.’ If I lost my job or had health issues, I would not become homeless. Housel articulates this concept: “The ability to stick around for a long time, without wiping out or being forced to give up, is what makes the biggest difference. This should be the cornerstone of your strategy, whether it’s in investing or your career or a business you own.” (page 60)
I witnessed this strategy in my youth. My dad always wanted a boat. He eventually bought a small old boat, but it wasn’t the boat he really wanted. He did not have enough money to have his dream boat and still pay for his four kids to go to expensive colleges. My parents invested in their children’s college education after several decades of prudent saving. My parents took the long-term view based on their values and priorities. “Compounding only works if you can give an asset years and years to grow. It’s like planting oak trees: A year of growth will never show much progress, 10 years can make a meaningful difference, and 50 years can create something absolutely extraordinary.” (page 61) My parents witnessed their four children’s college education compound through their six grandchildren’s college education. Their focus was multigenerational needs, not short-term desires.
Charlie Munger, vice-chairman of Berkshire Hathaway, said: “I did not intend to get rich. I just wanted to get independent.” (page 214) and “The first rule of compounding is to never interrupt it unnecessarily.” (page 218) This is easier said than done as life has its volatile periods. But taking the long-term view on life’s needs and pushing back on lower priority wants allows the miracle of compounding to happen.
Christians are taught in Scripture not to worship money (1 Timothy 6:10) and to be good stewards of God’s creation (Genesis 1:26-30). Being competent with money is not loving money but stewarding this resource wisely. Investing in your family, community, church, and business for the long-term benefit of future generations lowers the downside risks. This means sacrificing the immediate wants for the more stable needs that you currently have or will one day face. Jesus understood this truth: “Everyone then who hears these words of mine and acts on them will be like a wise man who built his house on rock. The rain fell, the floods came, and the winds blew and beat on that house, but it did not fall, because it had been founded on rock.” (Matthew 7:24-25, NRSV)