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The Pillars of the Earth- An Investment Lesson?


pillarsoftheearth I just finished reading a huge tome by Ken Follet, The Pillars of the Earth . It is a great read and there are many twists and turns plus lessons to learn. But be warned that it is over 1000 pages long.

One of the characters in the novel, Aliena, is the daughter of an Earl. She never had to worry about money as her father had both power and money. However, because his father supported the ‘wrong’ person for the throne, he was thrown in jail and Aliena became penniless overnight.

At the risk of giving too much of the plot away, Aliena managed to start a wool business through shrewd risk-taking by buying wool from farmers straight and transporting these wool to big villages with a vibrant market.

She became rich, but she forgot (or didn’t know) about diversification or minimization of risk. She risked everything she had saved and used leverage by borrowing from moneylenders to almost corner the entire wool market in the region.

What happened? She lost everything. If you interested to know exactly what happened, you should read the book. It is by far one of the best book I have read over the past few month.

Herein lies four lessons:

1. Diversify your holdings- don’t put everything to one counter

2. Never use leverage- it may increase your returns, but it will also magnify your losses and you may lose not just everything but end up owing people lots of money

3. Keep a cash reserve- you never know when you need money urgently, or to exploit an opportunity

4. Risk is a double edged sword, use it wisely- taking in some risk will make you money, too much and you are liable to lose. A bit like the investor versus speculator dilemma.

May these four pillars make your own investment portfolio foundations become stronger.

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