How Mother Bonaparte hedged her life

Letizia Bonaparte was a widow by the time she was 35. In that time, she had given birth to 13 children – 8 of whom lived. Time had made her a practical woman, as she had found herself penniless quite a few times in life.

And so, when her most famous son – Napoleon Bonaparte waged war against the British, Letizia did something that people found very distasteful and disloyal. She sold her French holdings and converted them to British pounds.

She reasoned: if Napoleon won, she would live a lavish life as “Madame Mere” in a victorious nation. But what if Napoleon lost? And so she very practically hedged against the situation of becoming penniless again.

Hedging your bets

Legend has it that Elvis Presley wore multiple necklaces – each of different faith. When asked about it, he just said that he didn’t want to find out after death that he had picked the wrong God and could not enter heaven!

Hedging is difficult. Because you have to put away your optimism for a minute. And think of the worst thing that can happen. But it’s essential to build a hedging mindset. Because that allows you to survive.

Hedging means insuring yourself against failure.

If you get stock options from your company, you should sell it and buy a competitor’s stocks. That may sound disloyal. But if your company faces a difficult time, then it will mean you losing your job and at the same time your stocks losing their value. 

If you work in the tech industry, don’t invest in the tech industry even though it seems to be growing the fastest. Invest in tourism or manufacturing – an industry that is uncorrelated with your own.

You’ve got to ask what’s the worst that can happen. And then find uncorrelated events which won’t be affected. Smart stock market investors keep a little bit of gold in their portfolio. Not because they believe gold will earn higher returns. But because they know that historically, gold has been uncorrelated with the stock market. If the stock market crashes, gold won’t – and they will have some protection.

That’s what you’ve got to do. Find your uncorrelated gold pairing to every major activity that you do.

Action Summary: How to hedge?

  • Ask whats the worst that can happen. How can I survive if the worst actually happens?
  • Find an uncorrelated thing to your primary activity. Because that works as an insurance against your primary activity.