I recently read an article that focused on a mental model developed on the number Zero. We all understand what the number zero indicates and since our childhood, we have been taught that any number or equation multiplied by zero loses its value completely. No matter how big or small the equation is, multiplying it by zero will nullify its value.
Surprisingly, the principle of multiplying by zero is also applicable outside the field of mathematics. For Instance, assume you and your family go out for a movie night. On your way to the movie theatre, you face no traffic and have a pleasant drive. On arriving at the movie theatre, you notice the seats are super comfortable and clean. The ambiance, food, and popcorn are delicious. But, once the movie starts, you realize that the video and audio quality of the movie theatre are terrible. You notice multiple black spots on the screen and a cacophony. Do you think you will visit such a theatre again in the future?
Probably not! Great video and audio quality could compensate for okay food, comfortable seats, and okay popcorn, but not the other way round. The audio and video quality is zero for any movie theatre. It does not matter how hard they focus on the ambiance, the quality of the seat, and the food. But if they fail to provide a decent quality on what’s the most important factor in a movie theatre everything else just loses its value.
If you think through the lens of zero when it comes to investment, finding zero becomes the most critical aspect of your portfolio. Because If there exists a zero in your investments then regardless of how well-designed your portfolio is, in the end, it will yield the value of ZERO!
So how do you find the zero in your investments? I suggest you start by asking yourself this question.
What is the intended purpose of your investment?
The purpose of your investment will reveal what your zero should be. For instance, If you are saving for your child’s college education. Then providing for your child's education when she turns 18 would be the crucial thing. If you fail to provide for that goal when it comes due, all your effort of savings gets wasted. It would not matter if your investment yielded a 20% CAGR or 8% CAGR during your investment because the intended purpose of the investment has not been met.
Transforming zeroes into one thus becomes an important task for any investor. But it cannot happen overnight. It requires a lateral shift in one’s thinking. Zeroes flow into our system through our culture, norms, or our society. Unfortunately, when it comes to investing, the majority of the community has molded us into thinking about returns first. We compare, judge, and pretty much take every decision of investing basis returns of the underlying.
All the pain of not meeting one’s important life goal can be avoided by a simple exercise of financial planning. Going through the exercise wouldn't mean you are all set for life, but at least you will have a better understanding of the pitfalls that lie ahead for you.
We see our lives as a multiplicative system. We want our skills and experience gained from one field to help us solve problems in other aspects of our lives. Similarly, we want our hard-earned money to support various aspects of our lives. As we know already that a zero in any multiplicative system will reduce it to nothing, and so we have to make sure that we at least transform those zeroes into one when it comes to investing.
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