Stop Adding and Start Subtracting

In 2016 I handed my boss a two-word resignation letter. “I’m resigning.”

That letter was maybe the best thing for my investment portfolio. When you don’t get a paycheck anymore it forces you into decisions.

Need cash for bills? Take some profits.
Want to buy a new stock? Gotta sell something.
Increase the size of an investment? Figure out what to trim.

Incidentally, this is what business owners do. What companies pay CEOs for. To decide how to deploy their resources. The money and the people (which is all just money).

Unfortunately, deciding what things get money, and how much money they get, is a hard skill to master. In theory, it’s cost of capital, hurdle rates, and so on. But in practice, there’s a difference between theory and practice. It’s very easy to underestimate costs and overestimate benefits. That’s why you hear about companies doing “restructuring” or “writedowns”.

Anyways, when you’re getting a paycheck investing is straightforward. You add some cash to your investment account, buy the funds or stocks or whatever that you like, and you’re done.

The problem is that it’s very tempting to keep adding investments. That’s why you’ll see people with 27 index funds or 140 stocks.

Now, you might think that owning 100 stocks is smart. That you’re diversified. But if you own 100 stocks it also means that your average position size is 1%. What happens if one of those stocks goes up a life-changing 1,000%? Not much. The portfolio goes up 10%.

The typical reason someone owns 27 funds or 140 stocks is that they don’t have much confidence in what they’re doing. That’s okay! There’s a solution.

So there I was. Had just resigned. “Uh, how do I live off investments?”

No one really teaches you how to do that. I wasn’t sure where to begin. But then I inverted the problem: “If I sold all my investments today, and started a new portfolio with the proceeds, what would I buy?”

That little thought experiment was the key! It somehow gave me the permission to sell the things that needed selling, resize the investments that needed resizing, and to set aside enough cash to pay the bills.

More surprising though, my portfolio started performing better. It improved my results.

Because that’s what happens when you deploy your resources more effectively! As you take money from your 27th best idea to put into your 1st. And this builds your confidence.

You’re now practicing the other side of capital allocation. It often gets overlooked because it’s harder. Subtracting.

There’s a beautiful quote from Antoine de Saint-Exupery: “Perfection is achieved, not when there is nothing more to add, but when there is nothing left to take away.”

When you’re working for money it’s easy to focus on adding. Adding to your salary. Adding to your accounts. Adding to your portfolio.

But what I’ve learned is that subtracting is a remarkably powerful tool. If you’ve spent years working hard to add, maybe it’s time to work hard to subtract.

Think of it like Michelangelo staring at a big block of marble. Just keep subtracting until David appears.