The Law of Risk
If you can't explain it simply, don't invest in it.
Complexity is a warning sign, not a feature. Wall Street designs complicated products not to help you - but to hide fees and risks. Credit default swaps, collateralized debt obligations, yield farming protocols - the complexity exists so you can't ask the right questions. Simple investments have survived centuries: owning businesses, owning real estate, lending money for interest.
Deep Dive
Every investment should pass the 'one sentence test.' Stocks: 'I own part of a company that earns profits.' Bonds: 'I lend money and receive interest.' Real estate: 'I own property that generates rent or appreciates.' Index funds: 'I own tiny pieces of many companies.' If you can't write this sentence for an investment, you don't understand it. If you don't understand it, you'll panic during volatility. You'll sell at the worst time. You'll blame the market, but the fault was buying something you didn't understand. Crypto, NFTs, SPACs, meme stocks - ask yourself: What is the underlying source of value? How does this generate returns? Why will someone pay more for it tomorrow? If the answer is 'because others will pay more,' that's speculation, not investing. Games of greater fools end badly for most players.
Do This Today
Write down every investment you currently own. Next to each, write ONE sentence explaining how it makes money. If you can't, consider selling and moving to something simple.
Avoid This
Investing based on tips from friends, TikTok, or 'experts' on TV. They have different goals, different risk tolerances, and often face no consequences for being wrong.
"Risk comes from not knowing what you're doing."
Remember
- The Rule: If you can't explain it simply, don't invest in it.
- The Action: Write down every investment you currently own. Next to each, write ONE sentence explaining how it makes money. If you can't, consider selling and moving to something simple.