The Fourth Law of Gold

Worried woman losing money in an investment.

This is part 4 of the series based on the 5 Laws of Gold. Let's start with the Fourth Law of Gold in the "Richest Man in Babylon", with the italics from the book, and the updated words as the sub-bullet.

“Gold slippeth away from the man who invests it in businesses or purposes with which he is not familiar or which are not approved by those skilled in its keep.”

• Your invested money could get drastically reduced and wiped out by investing in things and businesses you don't know or understand. If you invest in a lemon, you will get the tears to prove it.

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You've worked hard to save (e.g., using the Habit of 10%), put aside money, and lived on less than you earn. For quite a while you've done this, as your savings grow. The saved portion, after being able to meet emergencies, is now ready for investments and making more! As highlighted in The Market for "Lemons" (Akerlof, 1970), in the purchase of goods there can be both many options and a range of the quality of the options. A lemon problem arises due to asymmetric information (i.e., one party, typically the seller, has more information than another), and a profitable exchange doesn't occur. Lemons "or poor products with low durability that the buyer purchased without sufficient information" (Chen, 2024) are left.

Extended to investments, an asymmetry of information exists "regarding the value of an investment or product" which is "possessed by the buyer and the seller" (Chen, 2024). If you don't know what you are doing, you can easily buy a "lemon", like a poor investment, and your money could slip or run away.

Investment is fundamental to having your money work for you and grow, as mentioned in the Second Law and the Third Law of Gold. The key is, do you know what you're investing in? The Fourth Law highlights the likelihood of invested money slipping away from you if you are unaware or don't vet carefully.

Investments have risks and you could lose your principal, but risks can be lowered or mitigated through knowledge and experience. These are some questions to consider:

• Do you have an idea of the risks?

• Have you checked with others who can vet the investment and plans?

• Can you get your hard-earned and saved principal back easily?

• Have you got the knowledge and familiarity in the investment or field?

• How much are you willing to lose, if your decision(s) is incorrect?

These are challenging questions to ask yourself, but they are to protect you and your growing money. If you're not familiar with an investment, get good advice and guidance to see if it is a sound investment, or avoid it.

Stock picking and trying to time the market

Individual stock picking is highlighted as an example where the information asymmetry is large, and "participation in the financial market investment expanded significantly over the past decade, with considerable growth during the COVID-19 pandemic" (Wheat et al., 2024).

Remember for every transaction, there is a buyer and seller. In buying and selling individual stocks or trying to time the entry and exit, let us say you're a retail investor or a non-professional, i.e., "individuals who invest their own money, typically on their own behalf" (Palmer, 2024). If you're on the buy side at a certain price, and the transaction goes through, someone else is on the sell side. Vice versa, if you're on the sell side, someone is on the buy side of a stock transaction. Otherwise, the market won't clear or trade at a specific price. The question then comes who are you trading with? Who is on the opposite side of the trade? Is it an inexperienced investor (like yourself!?), a rare and good Independent Speculator, an experienced long-term investor, or perhaps an institutional investor i.e. "professional entities that invest massive sums" (Salvucci, 2024)? In the United States, approximately "80% of the market cap of the U.S. equities is in their (institutional investors') control" (Salvucci, 2024).

Normally someone way better, more experienced, sharper, with more resources, and a lot more money is on the other side of the trade. You can do well buying single stocks that appreciate considerably. Many do if you are willing to invest for long time horizons, and "being aware of the common psychological traits that affect investment decisions, but this take time - - there are no shortcuts here" (Capital.com via the Financial Times). There are rare cases of finding truly exceptional stocks, but it would be difficult without knowledge or experience in stock picking on your own.

Getting into Netflix in 2002 with $10,000, and riding the dramatic rises and falls to 2023, that single investment was "worth a whopping $3.2 million" as of February 2023 (Di Pizio, 2023). Most individuals are unlikely to find the next unicorn, and several investment services exist to support retail or non-professional investors. As Monique Le put it in 'The Retail Investor Report', "Retail investors are strategy-seekers more than they are stock-pickers. We continue to be impressed by the evolution of individual investors and the ways in which they are identifying opportunities that meet their long-term investment objectives" (Einhorn, et al., 2023).

A Tale of Two Businesses

Let's take the example of two businesses. In both cases, a 'friend' comes to you with an investing idea, and you invest $10,000.

In the first, Suzy comes to you in 2021. It would just take $10,000 to make a great return. You can't fail she says! She's heard about a hot new company and is going in with her money too. She wants you to get in on this early-stage investment. You decide since she's your friend, to listen to her pitch. It's the electric vehicle (EV) company Rivian, in 2021 just before the Initial Public Offering (IPO). She mentions that "A $1,000 investment in Tesla in November 2011 would be worth just over $204,000" as of 4th of November 2021 (Vega, 2021)! Imagine you had invested $10,000 into Tesla?

She believes Rivian could do the same, based on a good hunch, and that hundreds of thousands of Rivians could be manufactured and delivered. You haven't looked at fundamentals, checked the manufacturing capacity of their plants or expected sales from pre-orders, or if you even think Rivian could be an EV competitor, but decide to invest since your friend is too. If you had invested $10,000 into Rivian (because of your 'friend' and you think it could pan out), and got the $78.00 per share price [the IPO price (Pope, 2023)] on the 10th of November 2021, you would have bought approximately 128.205 shares. Three days later, it closed at $129.95 per share (Johnston, 2021). Had you sold it just at the close of the 12th of November 2021, your investment would have skyrocketed to a value of $16,660, nearly a $6,660 gain, in 3 days! By February 2023 the "$10,000 investment would be worth just over $1,900" (Pope, 2023). As of the 7th of February 2025, Rivian closed at $12.48 per share (Yahoo Finance, 2025). Your investment as of the 7th of February 2025 would be worth approximately $1,600. Trusting your friend lost you about $8,400 because you didn't know or understand the investment. You lost out because you were unaware of the risks.

Stock price history of Rivian (RIVN) from November 2021 to February 2025. Chart as of 7th Feb. 2025. Source - YahooFinance

The example is highlighting not that you can't trust your friend. It is that you may for reasons outside of the company's control not make a significant return, and could easily lose money if you invest in something you don't understand well.

Now the second friend, Alan comes to you. You are a little bruised from the first friend but listen to the second's pitch. He runs a manufacturing facility and could use the $10,000 to increase the capacity of one of his machines. He has secured the price of the upgrade and has vetted the supplier. He knows his facility and highlights that increasing the capacity of one of his key machines could increase the production of a product by 30-40%. He is backlogged and can't meet the demand for the product. He highlights the risks, but also the increased revenue from selling more of the popular product. The $10,000 investment you make, allows Alan to return to you nearly $13,600 in 3 years.

If you invest in things or businesses you're not familiar with or don't vet the investment for the risks, remember someone with more information and possibly ill intentions is trying to sell it to you. To make themselves rich, by hoping you don't know what you are doing or checking with those more experienced. The Fourth Law looks to guard your treasure from loss and protect you. Investments as in every game, you have to know the game, players, and the rules. As Benjamin Graham highlighted in 'The Intelligent Investor', “investing isn’t about beating others at their game. It’s about controlling yourself at your own game.” (Graham, 1973).

To your success.