Schmuck Insurance
Use a small personal allocation to test FOMO without risking core capital.
- Difficulty
- Easy
- Time to result
- ~ongoing to results
- Steps
- 5
- Confidence
- 95%
Schmuck Insurance is a bounded participation rule for situations in which an investor distrusts prevailing valuations but recognizes the possibility of being wrong. First articulate the uncomfortable alternative thesis: the boom may contain genuine innovations or opportunities that the investor’s current model misses. Allocate a deliberately small amount of personal capital that can be lost without threatening the core portfolio or fiduciary obligations. Spread the allocation across selected managers or assets that provide exposure and information. Observe actual decisions, incentives, price behavior, and personal emotions rather than commentating from outside. The result is both limited upside participation and a practical learning channel. The method fails if fear of missing out causes the experimental sleeve to expand, if other people’s money is used, or if gains are mistaken for proof of skill.
Origin
Lindzon used the phrase for small personal investments made during the 2020–2021 boom while Social Leverage withheld most limited-partner capital from deals it considered rushed or overpriced.
Core principles
- 01Uncertainty does not require an all-or-nothing bet.
- 02Small positions can produce information and emotional feedback.
- 03Fiduciary capital deserves stricter protection than personal experimental capital.
- 04Participation reveals market behavior that commentary alone cannot.
- 05The insurance allocation must remain small enough to fail safely.
How to run it
- 1
Name the uncertainty
Write down why you distrust the opportunity and how your view could nevertheless be wrong. Define what you hope participation will teach you.
Pro tip Use a falsifiable thesis rather than saying only that markets feel crazy.
Watch out Do not invest merely to relieve social pressure.
- 2
Cap the insurance sleeve
Choose a small percentage or fixed amount that can be lost completely. Keep it separate from core assets and fiduciary capital.
Pro tip Set the limit before selecting exciting opportunities.
Watch out Never replenish the sleeve automatically after losses.
- 3
Buy informational exposure
Select investments, managers, or products that reveal how the emerging market actually works. Prefer diversified learning over a single oversized wager.
Pro tip Choose exposures that give access to participants, reporting, or operating data.
Watch out A position that teaches nothing is speculation without informational value.
- 4
Observe behavior and emotion
Track how managers deploy funds, how valuations change, and how you react to gains and losses. Compare observations with the original thesis.
Pro tip Maintain a decision journal so hindsight cannot rewrite the rationale.
Watch out Profits during a boom do not prove the process was sound.
- 5
Protect the core decision
Use the learning to update future investment policy while keeping the experimental loss bounded. Do not let participation force the main portfolio into the same trade.
Pro tip Define evidence that would justify either broader adoption or complete withdrawal.
Watch out FOMO often disguises itself as a strategic update.
In the wild
Lindzon invested small personal amounts with young managers, including a $25,000 allocation to Packy McCormick’s fund, while declining to make similarly speculative commitments with Social Leverage’s limited-partner capital.
→ He participated enough to study the cycle while the fund avoided broader exposure to inflated 2021 and 2022 deals.
Personal exposure to crypto funds and other boom-era investments let Lindzon experience the market’s incentives and emotional pull. He concluded that many intelligent participants, himself included, had become caught up in the moment.
→ The bounded bets improved his understanding of late-cycle behavior without defining the firm’s portfolio.
Common mistakes
Using fiduciary money
An experimental allocation should not transfer one investor’s FOMO or curiosity to clients or limited partners.
Letting the sleeve grow
The risk control disappears when rising prices persuade the investor to turn a small test into a core position.
Confusing profit with validation
A speculative position can make money even when its process, valuation, or risk assumptions were poor.
Is it for you?
Best for
It is best for experienced investors confronting a boom they distrust but still need to understand.
Not ideal for
It is not ideal for people who cannot enforce position limits or who may treat speculation as essential savings.
From the transcript
“I started placing personal bets with money that I had made just in case I was wrong, but not my LP's money.”
“But that's why we have schmock insurance and don't use our LP's money for these dumb ideas.”
“I feel like I have to still be in the game.”
From the episode
Howard Lindzon on Business Ideas Before the Internet