There are three character traits that you can possess that will make sure you never become a financially independent investor that lives fully on the income generated by his business holdings.

First, you need to be someone who has absolutely no perseverance skills whatsoever. When you spend a couple months saving $1,000 and only see $7.50 in dividend checks, you should reach the conclusion that the system is rigged and completely give up. Instead of realizing that you now own something that is going to automatically increase in income by 7-11% each year, and instead of working hard to add to the pile, you should conclude that any objective that cannot be reached within a year is not worth, and then toss your dream to the side simply because it could not be achieved immediately.

Secondly, if you truly want to never become successful and you want to have a terribly depressing time while being unsuccessful, you should frequently obsess over your neighbors and give up on your current strategy anytime you sense that someone is making more money than you. If gold goes up 20% in a year, or some emerging market fund has a 55% annual performance, why settle for the 8-12% that is part of your current strategy?  Sell, sell, sell. Chase the latest fad. Always worry about what other people are thinking. That is they key.

And lastly, if you encounter adversity along the way, throw in the towel as soon as that trouble shows up. Built a $200,000 portfolio that consisted of $40,000 worth of bank stocks that went bankrupt during the recession? Don’t bounce back from that mistake. As soon as something bad happens, refuse to learn from the mistake and come back stronger. If you really want to fail, you have to let the mistake consume you. Ideally, a Wachovia bankruptcy should have you bedridden for at least a week. Instead of catching a second week and finding a manic energy to make new money to plug in the hole, you should automatically use the bad event as an excuse to give up.

Why did I write this article?

My favorite technique from Charlie Munger is to find success by identifying and chronicling the steps that will lead to failure. To screw up, you need to think short-term, get carried away by other faddish strategies that are currently making more money, and react to adversity with any of your investments poorly.

By identifying those three things, we can then identify what we need to do to be successful. You have to grind it out in the early ideas when the dividend checks are small. You have to be content with 8-12% growth because there is a very highly likelihood of it happening, as opposed to a different strategy that requires excessive risk. And also, you have to power through failure. Warren Buffett was buying American Express stock when JFK got assassinated. He was buying it when his dad died, and he didn’t go to work for a month because he was so depressed. And in the 1990s, he bought Dexter Shoe, which caused him to lose over 90% of his total investment. If someone as brilliant as Warren Buffett  can screw up, I’m not going to proceed with the expectation that I will have a perfect investing career. Instead, I diversify so that a few complete screw-ups along the way won’t derail my plans.

When you look at your investments, you should ask yourself: What would screw this up? Then, it is just a matter of filling in the pot holes. Maybe it means diversifying into more stocks. Maybe it means adding more cash to your portfolio. Maybe it means picking up a rental property. Maybe it is as simple as the need to save more money. When you think through worst-case scenarios regularly as part of mentally stress testing your portfolio, you can cut out a lot of potential hardship before it even comes your way.

Originally posted 2013-12-06 08:18:17.

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