The Rebbe’s response was brief—just a few words. Avrohom Averick was an experienced investor, but he sought guidance and a bracha as he approached a massive new endeavor. In his kvittel, he outlined his once-in-a-lifetime opportunity to earn unbelievable wealth. The deal seemed very secure but required the investment of a substantial portion of his net worth plus accepting debt obligations multiple times that number. Sadly, the Rebbe was too sick to accept visitors; the small postcard he sent back to Avrohom would have to do. All it said was, “See Bava Metzia 42a.”

What was the Rebbe’s message?

“Naive” Diversification 

Academic researchers credit the Gemara for providing the earliest written recommendation for investment diversification. The advice states that “a person should always divide his money into three: one-third in land, one-third in commerce, and one-third in cash at hand.” “Talmudic diversification” lacks the mathematical underpinnings favored by professors and is therefore assumed by them to be a “naïve” strategy in which one simply invests equally in all available options. A simulated portfolio based on “naïve Talmudic diversification,” with one-third each invested in stocks, REITs, and cash, produced excellent long-term results: 9.5% annually from 1970–2018. Nevertheless, financial researchers conclude that modern diversification strategies, where each portfolio component provides a targeted level of risk-adjusted return, are superior to a simplistic ancient approach.

Missing the Barbell Boat

Alas, for all their mathematical and research savvy, these scholars missed the underlying meaning of the Gemara. Every mesivta bachur knows that each of the three legs of the “Talmudic portfolio” serves a specific portfolio purpose, and, much like modern portfolio theory recommends, each asset complements the other. More specifically, the Gemara is advocating for “barbell investing,” as in the shape of the so-named exercise equipment. Unlike conventional portfolios, barbell investing utilizes the extremes of the risk-reward spectrum, balancing both super-safe and super-risky investments while avoiding middling financial options. This approach counts on a rock-solid foundation to endure economic storms while keeping vast open potential through the portions invested in the highest growth components. Here are how the Gemara’s three recommended portfolio parts—land, commerce, and cash—work in unison.

“Land” Means Unfailing Safety

The land component of the Gemara portfolio is about building on a platform of unwavering stability. As various gemaros make clear, land was a low-risk but low-growth investment. Keeping a constant chunk of a portfolio in this “can’t lose” category provides stability required for undertaking significant risk with the rest of the money. Today as well, when purchased mortgage free, real estate has mostly kept that slow-but-steady profile. The reason real estate is considered risky today is because most investors (and REITs too) use massive amounts of mortgage leverage. While debt significantly increases real estate’s potential returns, heavily mortgaged property doesn’t satisfy the Gemara’s recommendation for absolute financial protection.

Commerce + Cash = Booming Potential

With a third of one’s money providing a secure foundation, the investor is then encouraged to bet on commerce with another one-third of his money. But unlike the researchers’ stocks, which averaged just 10–15% annually, trade in the Gemara’s times offered the potential for triple-digit annual returns. The Gemara explains that one who had just 50 zuz invested in trade was as financially well off as another with 200 zuz sitting in cash, an equivalent of 300% returns. But hugely profitable trading, i.e., buying undervalued goods and reselling them elsewhere for much higher prices, requires keeping plenty of available cash. The final third sleeve of the “Talmudic portfolio,” liquid cash, was held to enable the scooping up of bargains as they arose; it didn’t just sit around as the academics assume.

Barbell Investing: Not Such a New Approach

Barbell investing provides the potential for high returns but without catastrophic risk. In ancient times losing one’s assets meant starvation. In the late 1920s, investors who were heavily invested in stocks were mostly destroyed, never reaping the gains that the markets ultimately provided. And even today, heavily leveraged real estate investors face total wipeouts in various reasonably possible scenarios. While tempting financial destruction is unacceptable, there’s a need to make big money to support growing families. Simply avoiding all risk can mean guaranteed income shortfalls, also a very unpalatable choice. The Gemara’s portfolio is a sophisticated big-picture balance between complex risk-reward scenarios. And famed investors like Ray Dalio, manager of the world’s largest hedge fund, and Nassim Taleb, author of The Black Swan, who use barbell strategies, are following a path the Amora’im recommended over 1,500 years ago! Naïve my foot.

The Rebbe’s Reminder

The bottom line then, is: one-third of a Gemara-recommended portfolio (land) is for security, while two-thirds (commerce plus liquid cash to facilitate purchasing) are focused on maximum growth. When markets do well, however, people tend to become overconfident, going all in without leaving some investments in secure places. Every couple of years there are heartbreaking stories of businessmen who invested everything they had and lost it all. Could they not have kept one-third secured (and creditor protected) in unlevered real estate or a significant cash-value life insurance policy? Perhaps they couldn’t. But some get so excited by a “once-in-a-lifetime” growth opportunity that they ignored the other two legs, stability and liquidity. This practice is against the Gemara’s recommendations. Sometimes you need a Rebbe to remind you how to make money.