ChatGPT Asked: What is the Most Important Principle for Investing

less than 1m read

·Nov 8, 2024

I was asked a question from chat GPT. Interesting, so I'll tell you. Although I suspect you probably can get an equally good answer from chat GPT, the most important principle is about what I call the Holy Grail of investing.

And that's about diversification. What it means is, in a nutshell, I could describe it as if you can get 10 or 15 good uncorrelated investments, you can reduce your risk by up to 80 percent without reducing your return. That means you increase your return to risk ratio by a factor of five. Risk reduction is really key.

So, uh, it's how, it's a know-how to diversify well in the area of 10 or 15 investments. If you can do that, then you will make a fortune, because making a fortune is not just a matter of the upside. It eliminates or reduces the downside so you continue to play the game.

A lot of people think that the way you make a lot of money is to come up with the best single or a few bets. That's wrong. That approach to the game will knock you out of the game. You'll have one terrible situation. Mind that what you don't know is greater than what you do know, and so the power of diversification is a really great power.

So I'd like you to understand what are you good at, what do you know, and what don't you know, and then how do you diversify well to have a good return relative to your risk. That's the most important principle.

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ChatGPT Asked: What is the Most Important Principle for Investing

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