I learnt portfolio theory during my MBA. If you have a set of risky but uncorrelated assets, the random movements in them negate each other somewhat and so overall risk on the portfolio is reduced significantly and the chances of a very large down or up move in the overall portfolio is lowered. I got it… intellectually. However, I didn’t really understand it viscerally until I started working at Zoomcar.
One risk Zoomcar always ran was people doing ‘bad things’ with our cars – total loss accidents (bad), hitting someone else (really bad), stealing them (ah, f*ck), using them for criminal activities (oh boy…), etc. Add to that the ineffective police and slow moving Indian judiciary system and you’ll understand why renting cars without drivers wasn’t really a thing in India until Zoomcar came in. As the CFO responsible for protecting our asset base, this was something I was paranoid about. Banks also asked us how we dealt with these risks before lending to us. And, to be sure, we continually invested in technology to mitigate these risks – GPS trackers, speed limiters, engine immobilisers, safe driving monitors, etc.
However, I realised over the first few months that over-focusing on these risks wasn’t productive. We couldn’t entirely prevent such incidents from occurring. And while each such incident was painful to deal with, what mattered was the overall portfolio of bookings people were making on our cars. In what percentage of cases were ‘bad things’ happening and what was that costing us vs. the total earnings from car bookings? If that ratio of cost to earnings was manageable, then we could build a sustainable business.
The same is true of my financial portfolio. Having seen the crash of 2008 first hand, I was sworn off stocks for a decade and missed the rally. However, a few years back I hired a financial advisor who built a diversified portfolio of stocks and bonds for me. It was one of the best decisions I made. A few months back I read a report predicting that banking stocks are going to be hit hard. I immediately called my advisor saying we should sell my banking stocks. And she was like, “Eh, but they’re only 4% of your portfolio… Will them going down really have an effect?”. Point taken. Portfolio theory for the win! Btw, bank stocks are up since that conversation.
One obvious corollary to portfolio theory is that if you have a single bet, then the risk of a significant down or up move is very high. Think YOLO-ing your savings into meme stock call options. You could make out like a bandit or lose everything.
One area of our life we are usually taking a single bet is our work. Most of us learn a specialisation in university, hold a single job with a single mandate, focus and give it everything we have. If you agree with portfolio theory, then this is a risky bet to take. You might do really well, or it might not be the right place for you, your position/skills might become redundant or the company might go bust (Lehman Brothers!).
So I’m trying to make a conscious effort to diversify my ‘work portfolio’. I’m spending time building my startup and private company investment portfolio to have alternate sources of upside and evaluate investing as a career path. I’m learning new skills that I can stack on top of what I already know to open up new career paths. I’m learning about emerging industries and what people are building so I can broaden the areas I can work in. I don’t know which ones of these will pay off, but I’m reasonably sure my portfolio overall will do fine.