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My approach to personal finance
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My approach to personal finance

Tags
Finance
Date
February 21, 2024
Person
N
Nasrudin Salim
Last edited by
N
Nasrudin Salim
Last edited time
February 27, 2024 12:41 PM
2 more properties
My strategy has been fundamentally simple yet profoundly effective: prioritize savings to establish a solid financial foundation and extinguish any debts, then judiciously allocate a portion of my capital towards ventures promising returns from 2X to 10X. The essence of this approach lies in engaging with investments that fall within my domain of expertise and influence, enabling me to actively contribute to and partake in their success.

As Nassim Taleb illustrated above, “The Barbell Strategy” (Taleb, 2007).

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The Barbell Strategy is a dual-component investment approach designed to balance risk and reward by allocating assets to two extreme ends of the risk spectrum, with little to no investment in the middle-risk categories
In my financial journey, a pivotal shift occurred after surpassing the $1m net worth milestone, marked by a pronounced acceleration in wealth growth. This transition can be attributed to a strategic embrace of higher-risk investments.
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This rapid accumulation was largely due to engaging in multiple high-risk ventures simultaneously as I can now afford the risk of extraordinary returns. This not only broadened my income streams but also fortified their stability and growth potential.
Achieving significant wealth in a short timeframe through the stock market is an ambition many hold but is often tempered by the reality of average annual returns, historically around 7% over the long term. This modest growth trajectory seems at odds with the visible emergence of young, self-made multimillionaires and billionaires. The key to their extraordinary success lies not in pursuing average returns but in embracing high-risk opportunities that come with the potential for extremely disproportionately high reward.

Rewards that far outweigh their risks - Pareto Principle and Zipf’s Law

The Pareto Principle and Zipf's Law are two concepts that describe distribution patterns observed across various fields, from economics to linguistics. Despite their different origins and typical applications, both principles highlight how a small fraction of causes or inputs tend to lead to a large portion of the effects or outputs.
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The Pareto Principle, also known as the 80/20 rule, posits that roughly 80% of effects come from 20% of causes
Business: 80% of sales often come from 20% of customers.
Productivity: 80% of results can come from 20% of efforts.
Software Development: 80% of errors or bugs can be attributed to 20% of the code base.
My proposition: That extremely high returns against risk also function with Zipf’s law, and yet does its counterpart: Extremely high risk for little to no returns.
Somewhere in the curve of returns against risk, there lies opportunities that rewards much more than its risk. Yet risk can be controlled, and these opportunities found through one’s understanding and expertise of each venture and business.
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Knowledge as a risk mitigator, Information Asymmetry and Network Building
Opportunities for disproportionate rewards often arise from information asymmetry—situations where one party has more or better information than others. Experts, by virtue of their deep domain knowledge, can leverage this asymmetry to identify high-reward opportunities that others might overlook or misjudge

With wisdom, comes courage to execute

All unwanted conditions endure due to an inability to understand. All unworkable solutions result from an inability to understand.
The curve of returns against risk is not a uniform frontier; it is punctuated by opportunities that, through expert insight and strategic management, offer disproportionately high rewards relative to their risks. Success in these ventures requires more than just the courage to engage with risk; it demands a comprehensive understanding of the venture, and a continuous quest for knowledge. For those equipped with deep expertise and strategic acumen, the landscape is rich with opportunities to achieve exceptional returns.
With wisdom and understanding comes the courage to execute plans - which only on the surface looks incredibly risky.
Official Website of Nasrudin Salim - nasrudinsalim.com
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