Investing is boring..
At least it should be. True investing is the deployment of your cash into income producing assets. Investing is not buying up the stock of a particular company because it seems trendy. Nor is it hopping on the bandwagon and buying because ‘everyone else is’.
That’s speculation. Not investing.
The pursuit of wealth creation should be based on true investing. Which is inherently boring, and long term. There is a time and place for speculation in the financial world. But it should only taken upon knowing full well what it is, and under particular conditions. There is a reason speculation is flashy while investing is really rather simple, dull and less spoken about.
When we think of investment we think of the stock market, flipping homes and mutual funds. The term has become a very broad one, and this can have a pervasive effect on our ability to safely and correctly invest our money.
Benjamin Graham, a monumental man in the financial world – Warren Buffet’s mentor – sought to define true investing. He described it as:
“An investment operation is one which, upon thorough analysis, promises safety of principal and a satisfactory return”
Opening a brokerage account to put thousands of dollars into a stock because you heard a family friend suggest it was likely to pop in the next few years is not investing. Buying a fixer-upper-home to redo the kitchen a sell for a profit because you’re parents made money selling their first home is not investing.
This is speculation and it is likened to gambling.
In a controlled environment, there is a time and place for speculation. It’s definitely not to say fortunes haven’t been made on simply that. They have.
Components of correct investing..
Looking again at the quote from Graham, true investing is based on careful analysis of the underlying components of a company. You look at the management team, the industry, the financial records, and other operational reports. You do this to get a healthy understanding of the ability of a company to thrive and continue to produce profits.
Safety of principal is critical. Slow and steady wins the race when it comes to investing. True investing is a long term game, won over many decades. Even a few bad plays can deeply affect your long term results. Protecting your principal should always been key. It’s often preferred to give up some performance to ensure your foundation isn’t eroded.
As I mentioned, there is a time and place for speculation. This is once you sit on a strong enough base of principal that you can afford to take some risks.
It should be noted, there are strategic risks, and greedy risks. For example, putting everything in one stock, hoping it will see exponential growth is greedy, speculative risk. Whereas putting a majority into an aggressive index fund is strategic risk. Because those indexes are self cleansing and the market always goes up.
All investing comes with a certain level of risk. You want to protect your principal foundation, but you need to be willing to handle some volatility to generate any means of profit.
Last, but not least..
Satisfactory return is an important component to consider when making an investment. Specifically you want to ask yourself two questions before investing your money and time:
- Is this investment vehicle a proper use of my money? Will it generate enough of a return to make it worth my time?
- Is the return overly ambitious, thereby threatening the safety of my principle?
Your satisfactory return rate, and risk tolerance (which is related to protecting your principal) will probably change over time. As a younger man, my risk threshold is much higher in search of higher returns than say, a 60 year old man who is much more interested in asset protection than chasing those higher returns.
That being said, I believe there is an unspoken minimum rate of return than you want to beat inflation otherwise you’re better off just leaving your money in a bank account generating 1.4% if you’re lucky. Which is probably half or less than what inflation really is.
Boring and best investment bet..
In short, I believe the answer to be total market or major index funds. With these major funds your are buying into many of the top corporations in the world, whose ability to withstand downturns and adapt to market changes are strong. You don’t have to worry about them going out of business because they are so large and major international players.
These large funds provide diversity and have built in cleansing attributes that allow for a passive approach. Total market funds combine every business in a particular market. You get the winners, the maintainers and a few losers which are eventually weeded out by the market.
These funds provide stable and growing returns, because if they didn’t that would mean every business in America or the entire stock market is declining. It goes without saying there are periods and cycles in the short term that sees decline, but you don’t ever have to worry about a total market fund going to zero. If that ever does happen, money won’t be much of a concern any longer. At that point all that will matter is how many bullets you have stashed in your back room.
The speculation strategy..
John Maynard Keynes was a famous economist and a founder of modern macroeconomic theory who stated the difference between speculation as the following:
Speculation is the activity of forecasting the psychology of the market, and investment the activity of forecasting the prospective yield of assets over their whole life.
Speculating is the acting of trying to predict what the market or a particular stock will do. It’s nonsense because no one can do that accurately and consistently. Building an investment strategy on guesswork – however educated it seems to be – is dangerous. It’s really just gambling.
The wrong guesstimation can wipe you out. A winning guess though, can make you a fortune. I mentioned no one can accurately and consistently tell what the market will do. You need to wholly understand this as the truth. No billion dollar portfolio manager has ever done this for any extended length of time.
The truth of the matter is though, speculation, just like gambling.. Is fun. It’s exciting and thrilling. You can make a lot of quick money. But you can lose it just as fast. Because of these facts, it is suggested to set aside only a small portion of your portfolio speculating. If you can’t resist the temptation. But you must set a limit, and that limit must contain money you are fully content with losing.
Graham suggests no more than 5% of your portfolio should be deployed for speculating.
Personally I have had more losers than winners. But my winner has much more than made up for the losers. Again, this can only be attributed to luck more than anything.
Some of my current speculations are in the medical marijuana industry and water stocks.
Smoke & mirrors..
Speculating is sexy, investing is not. One is instant gratification – or ruin – the other is monotonous. Speculating is assuming you know something no one else knows and when – if – you win, it’s an ego stroke. True investing is more time consuming, and there’s nothing exciting about it. You looked into a company or fund, it met your needs and you put money into it. Aside from consistent addition, you next to forget about it for years to come.
Not only is investing boring, it’s really quite simple. Once you understand what stock really is – ownership in a company – you can do it simply and without much assistance from ‘professionals’. Awhile back I wrote that financial literacy is for everyone, I still stand by that.
Investing shouldn’t need to be overly complicated with expensive managers and an overt amount of time spent dwelling on the market. If you’re paying more than 1.5% in fees you need to re-evaluate your positions.
Investing is simple. Anyone telling you different is trying to sell you something. Investing is also boring, long term and very little of it should be based on speculation.
Educate yourself on the basic, educate yourself on particular funds, and then commit to consistent building of a portfolio based around some total market funds. Once you have a foundation, if you’re willing to lose some cash making bets, be my guest.
I certainly am. But my #1 priority is still a foundation built around protecting my principal while receiving satisfactory returns. 6-7% is adequate.
What’s your investing strategy? Do you agree or disagree with what I’ve presented.. Let me know!
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