Rethinking Investing – Part 2

If you don’t believe in the power of the market, why do you have money in the stock market at all?

It doesn’t make sense to me.

Why not vote libertarian? You certainly seem like one…

I believe as long we know what we are doing, that should be all right regardless we allocate our money in stocks, bonds or currency.

Cheers

Vincent

Personal Development Blogger

But why vote? Nobody seems to have a reasonable answer to that question. If the world ended tomorrow or in a week or in a month, i wouldn’t go and vote. So it can’t be that important…

Good post. I think most people think they’re investing when they are in fact gambling. Especially those early twenties day trader types (who aren’t looking quite so pleased with themselves right now). Mind you, so is putting your money in the bank if you choose the wrong bank!

Tim – Thanks for another thought-provoking post on investing.

I agree, investment assets are ultimately a currency that can buy (or help subsidize) your goals, hopes and dreams for the future.

And while many spend a lot of time and money trying to “beat the market” in this pursuit, I think many could “allocate their resources to improve their quality of life” by taking a more simple approach the seeking an information advantage or wading into angel investing.

The 2 key ingredients are: 1) a low-cost, highly diversified portfolio of index or asset class funds. Bottom line: buy everything. and 2) Good behavior over time. This is the key to successful investing IMHO.

To be clear, this isn’t a “set it and forget it” strategy. There will be opportunities to rebalance the portfolio, harvest short-term tax losses and other strategic activities that can simultaneously add incremental returns while better controlling your ongoing risk exposures.

Thanks again for the post — look forward to seeing more on this topic.

Sorry Tim,

You put politics into a good blog, now I am gone. This was one of the last places to go without all the election nonsense being shoved at us. I guess you are just like the local business that sticks a ******** for president sign in the window and then wonders why half its customers seem offended and stop spending money there.

Funny thing: Funds race did not show you making a $200+ donation to either candidate.

Investing = “Allocating resources to improve quality of life.”

Interesting definition. One of the implications of this is that “quality of life” extends beyond you to the rest of the world.

In other words, only invest in companies that are changing the world in ways you agree with. To me, that’s the ultimate in socially responsible investing.

Hi Tim,

Great post as always and I agree – every eligible person must vote tomorrow – democracy is NOT a spectator sport.

I also urge everyone with children to take them to the polls with you and explain what is going on – and tell them their duty to vote. I’ve done this since my kids were born – and why I have not voted early. I’m taking my 2 boys to the polls tomorrow to impress on them the importance of our responsibilities. Not only should you vote tomorrow, but you need to pass the practice on to your children/grandchildren etc.

Also, if you have an enlighten manager – he/she won’t be pissed, but will give you time to vote. Back when I was working for the ‘man’ (alas, now that I’m the co-founder of my own company I find myself the ‘Man’ and its quit irksome to wail against myself 🙂 ) I always gave my folks either time in the morning, at lunch, or let them leave early to vote. A few took advantage of that (of which I always knew) but for the most part it got people who normally would not have voted out to vote.

best,

–Jack

Tim, great post, very good advice and some wonderful books for me to fill my time with. To be honest, I’m not going to vote tomorrow, a) because I am recovering from surgery and physically cannot, and b) because I can’t honestly cast my vote for any candidate and feel like I have truly voiced my opinion. I have considered write-ins, voting for no one, etc, but all of the other options just seem like a waste of time. Instead, I’ve committed myself to making the country as good as I can under any President there is, and hoping in 4 years I’ll have a much better choice to vote for, either from a new candidate, or one of these ones surprising me.

“I’d rather put my capital in angel investing and the few industries I understand, two areas where I have insider knowledge and connections that others don’t.”

Tim – Can you elaborate on this one, or are you planning to? I’d like to hear more about how you leverage your investments into your expertise.

When everyone is convinced the stock market offers no opportunity, then the opportunity will be greatest.

Hi Tim,

on your urging people to vote: I think I understand you a bit through your book, your work, your blog, and generally trying to understand the brain of people whom I respect. Of course I will invariably be “off-target” to some degree in every case. I have to say I am a little surprised by your urging people to go and vote.

I KNOW you are a guy that wants to change the world, I recognise the intensity. I am fascinated by your approach to life. Mostly because it produces effective results. So it is interesting to me and insofar as I can I try to keep up with what you’re up to and of course if I had a chance I’d love to get to know you. Personally I have never voted, nor do I think I ever will. Maybe you will think I am a cynic, but it’s not that. I subscribe to something that has best been espoused by Lysander Spooner:

http://www.panarchy.org/spooner/law.1882.html

You may have read his essay “Natural Law” before, if not I reccommend it. I am certain a brain like yours can only be impressed by the clear logic of this work.

Thanks for the blog it’s outstanding in every way and a real resource.

G.

It ought to be pretty evident that we don’t have meaningful choice in the political process anymore. Voting only gives the game more legitimacy. See “Mock the Vote” at http://mises.org/story/3170.

The last meaningful vote we have is with our money… for the time being. I think it’s wonderfully ironic that investing was the major theme here next to the political farce of voting.

Thanks, Tim.

Tim,

Look into “Permanent Portfolio” by Harry Browne when you get a chance. Latest book “Fail Safe Investing” is simplicity at its finest. 10% average annual ROI back to its start in 1970. Very low volatility which helps the melatonin take effect. Portfolio is set to profit in any market environment (including deflation) so you don’t need “information advantage.” Just set it, rebalance annually, and get back to BA.

Cheers,

Bill

Since you are on an investing kick, and an intellectual. I’d be curious to see what you think about socionomics. The theory behind this is that our societal trends, or “mood”, govern what the market is going to do (one theory based on this is the hemline theory). I recently came across the documentary “History’s Hidden Engine”. You can watch it hear…. http://www.socionomics.net/history . I thought it put an interesting perspective on investing.

To conclude, I too feel the same way about the market. In fact, I find the stock market to be the antithesis of how I like to invest. Unless I have a competitive advantage I won’t waste my time or money, and with the stock market you can actually go to jail if you have an advantage. I mean, the last thing I need is to be thrown in jail for insider trading …because I’m sure my stint with prison wouldn’t be as nice as Martha Stewart’s was 😛

To be analogous (and crudely humerous …hopefully)…

Investing in the stock market is like pissing in the wind, and hoping that you don’t accidentally whiz on your feet.

Have a good one Tim!

I loved this post, hurrah! 😀

Quick note, though. The anecdote in the beginning is completely rational from a trading perspective. “Fck Genentech” is completely correct, here’s why:

A) They’re assuming you’re a noninvestor, a casual person who doesn’t pay attention to the market, low information. They assume you probably get your information from magazine covers and newspaper headlines

B) The markets are not efficient, when news hits, it hits the investors and geeks first and the public last.

C) This means that by the time the public at large is familiar with a company, or more specifically excited about a company, it’s a great time to sell. This is because everyone else has already bought the stock. The public at large is last to get the news/idea/trend, and after everyone has bought, it’s gone as high as it can go.

D) This means that it’s generally a good principle that by the time it becomes polite dinner converation, the trade is done. There isn’t a conspiracy that oil prices go down whenever you complain to your neighbors about them, the trade is done.

Unfortunately, the people at the trading desks probably didn’t realize you process information a little differently than the public, and costanza trading off of you might prove worthless 😉

Hi All,

Thank you very much for your comments and dialogue. For those who have decided my mention of politics if the final straw and are bidding this blog goodbye, I wish you well. I recognize your screennames and have seen good comments from you in the past — sorry to see you go.

To answer a few other questions…

@Johannes – your question: if you don’t believe in power of market, why have any money in it at all?

Quick honestly, I get a kick out of gambling with a little money, and I feel like I do have better information in a few rare cases, but this is the percentage of my wallet I’d be willing to throw at blackjack — a low %.

@Marcie – re: investing in expertise

Yes, I hope to write more about how to invest in your expertise, or — at least — how I do it.

@Siraaj – re: website

I’m afraid I had this site custom designed by a college student here in the US, so it’s not a template theme. I do like the themes from http://www.pearsonified.com, though.

Here’s also a little footnote from an email I just wrote to a friend who wanted feedback on his decision to put almost all of his money into money market funds.

My response:

“What’s foolish or not depends on the type of lifestyle you want and what makes you nervous. Nervous = poor quality of life. I have 10% of my income going to angel investments, another 10% or so in a 401(k) that is 80/20 (bonds/stocks), and the rest of my net worth (80+% now) in Treasury-backed money market funds. I hate losing money more than I like making it.”

All the best,

Tim

@ Alex – Great Comment. You’re like the Zen Master of investing…

@ Tim – Nothing like throwing politics on the financial discussion to p*ss everyone off, haha. Although I disagree with your vote for Obama, I respect your decision. I really don’t think either candidate will do much for the country – status quo politics. There is no Change in Hope, only Action. And all I see from both of these guys is more government spending and more taxes. The Constitution is getting trampled on from both sides and no one cares. The response from Andy is very true. I hate watching talk shows and all of these celebrities getting up to talk about politics. The problem is they all say the SAME thing, blah blah blah. I have not heard any original ideas about the government, that is why I am going back to the basics. After the election I am going to snuggle up with a little book called “Conscience of a Conservative” by Barry Goldwater. Check it out…

Good Luck,

Dana

Investing does require an edge, but information is not the only kind. Other kinds of edges:

1. Temporal — willingness to hold one type of instrument, such as stocks or cash, for a very long time, i.e. years, until conditions are right to switch.

2. Emotional — ability to sleep at night while holding a highly volatile instruments.

These sound trivial on paper, but are actually rare and valuable enough to confer a big advantage. Illustrative example:

Since the 1870s, a simple rule to outperform the market has been to buy 100% into the index when its P/E ratio falls below 9, then sell 100% (go all cash) whenever the index P/E ratio is above 22. This rule outperformed the index by a factor of 7.

But this is so simple. What critical edge could be involved? The discipline of inaction. The temporal and emotional wherewithal to make only 9 trades in 125 years. This rule would have had you sitting on the sidelines since May 1995. It might require making no investment moves for most of your adult life. It would be impossible to be an investment adviser, or to hire one: who would pay a fee to a manager who did nothing for 15 years?

This strategy is impossible to execute unless you are currently very young, and prove to be exceptionally long-lived. Thus almost no one has the necessary edge to pursue it.

In a way the investing edge is like marketing strategy: there are many different paths to advantage, but they all involve being unique in a significant and sustainable way.

Tim et al –

I’d like to second the mention of “Fooled by Randomness” – not as a way to game the market, but as a sobering analysis of how ‘expert’ performance can be (and often is) the result of luck.

Key concept: have 10 people flip coins X many times. The loser (fewest ‘heads’) is eliminated. Keep going… eventually you’ll have a winner – who can point to his/her track record and say, “bet on me! – i have a 10-round track-record of flipping heads!”. This is exactly the situation with many mutual funds or expert-driven systems.

Yes, this is a similar idea to “A Random Walk Down Wall Street”.

Another Taleb idea, more fully fleshed out in the Black Swan book, is the idea of asymmetrical outcomes. i.e., 9/10 times you win 1 dollar – but 1/10 times you lose $50,000 / break your arm / sink your boat etc. The concept is that you have to consider both the very likely positive outcome and the very unlikely but SUPER BAD outcome when betting / investing.

As someone who totally buys into the ‘invest in what you are doing / know about’ concept, Tim, I think you have to be self-skeptical – what if a run of success is partly luck-driven?

To me, index fund investing (which Cuban would say is intrinsically foolish) is a way of hedging my own blind spots and spreading risk broadly.

Good post(s!)

– Karl

If so much hinges upon who wins the election why do you care more about me voting than *who* I vote for?

your video re Obama is not longer up

can we see it elsewhere

Here’s the deal — to beat the market consistently, you have to: 1) have better information than most people, 2) have superior analysis of the same information, or 3) have better luck than a Leprechaun

This is the mistake: everybody is trying to “beat” the market. There is a foolproof way to MATCH the market, which is good enough because the market does pretty well over the long haul. I’m obviously talking about index funds.

Those traders you witnessed have nothing to do with long-run returns. Their victims are the day-traders at home, not the long-term stock holder. Note, I say “stock holder” rather than “investor” in deference to your points about that word.

I have invested heavily when I’ve had insider information – just as you suggest. But I don’t only invest in those kinds of things. Right now, my investments are 50% index funds and 50% the stock of the company I used to work for (not publicly traded), which I had inside knowledge of and truly believe in. I quit that job after I got the stock (for purposes of diversification vis-a-vie my income from work and investment exposure).

What is stupid is “trading.” Even the pros (hedge funds and investment banks) are now finding that out. But trading has nothing to do with “investing.”

We support Ron Paul’s Campaign for Liberty and plan to vote third party tomorrow in order to make a statement that neither candidate’s policies are acceptable in light of the Constitution.

I’m always interested to hear others’ takes on our wild & crazy political system. Speaking of which, there’s nothing on Zeitgeist Addendum coming up in the blog search. Has anyone here seen it, and if so, do you plan to steer clear of the polls altogether?

Off to check out that crazy helmet in your photo (hope you told more of the tale in your Flickr album.) Do you have one of your virtual assistants following you around with a camera to get these great shots? 😉

Check your spam bin for my invite to the Global Launch of the CanDo! Creative Arts CO-OP & Purple Thistle Potluck Theatre on Thanksgiving Day, USA. We’ll be doing a simulcast from WiZiQ, if you’d like to pop in & say Hola! If anyone else is intrigued enough to check it out, click on my username and look for Events on the Main Page of the iLearn in Freedom Network.

Cheers ~

[[ If you have the potential to make 30% per annum in a given stock, but it keeps you up with sweaty palms at night, is that a good “investment”? ]]

Nobel Laureate Harry Markowitz (creator of Portfolio theory) split his retirement account evenly between Stocks and Bonds. When asked why…

“My intention was to minimize my future regret…” i.e. it’s a bet each way, to avoid the pain of losing money, which is worse than gaining (an equal $ amount).

OK:

Investing = gambling

Investing is a game. It is a game you play to see if you can beat the other players.

When you buy stock, your hope is that the demand for that stock will rise as the supply or amount of shares outstanding remains fixed. If either of these two things change by themselves, the price will change. Aside from that, there are a lot of strategies one can use when buying or selling stock. This is mainly because the stock market is so efficient and billions of shares of stock trade hands each trading day. You can buy and sell homes, but there are fewer strategies you have at your disposal because volume of homes bought/sold is much smaller and you can’t just sell a kitchen or a living room (as I’m sure many Americans would love to do).

All that being said, anytime you buy stock, someone is either making a gain or a loss on the sale. Anytime YOU sell a stock, you are making a gain or a loss. Therefore, each trade creates a loser or a winner. So each time you buy stock, someone is selling it for one of two reasons:

1) They think they can use the money for something with a higher return

2) They think the value of the stock will fall soon

When people think the market will go up they hold. This makes stocks more scarce and few trades will occur until the buyers bid prices higher. When people think the market will go down, this makes many trades occur until the prices are asked lower. This gives you two components to price, the bid and the ask. That is only half the story, but that’s the most important part because price is what we little guys care about.

Who cares what the company does? Why would you want to buy stock in a company other than to hope to one day sell the stock for a higher price or get some sort of return via dividend etc?

The goal of the game can now be refined: be one of the the first to find value in the stock and sell when others, hopefully many others, find value in the stock. It doesn’t matter weather its a “good company,” or that they make a lot of money, or that your 10 year old like the company’s products. You want to buy stocks that many people will begin to buy.

That being said, from a macro perspective of the market, fundamental analysis doesn’t matter right now, technical analysis doesn’t matter right now, and any long (hope to make money on the upside = long strategy) strategy that you can dream up DOES NOT MATTER RIGHT NOW!

Lets take a deep, long look at what is coming down the pipe. More Americans are getting older than are being born. We have a governmental deficit in America. Health care is expensive as hell because it takes 10 years to get an M.D. in the market. This evidence gives us a pretty strong clue to what is about to happen. It doesn’t matter who is President, taxes will go up. Someone is either going to have to pay for social security, medicare, and the deficit, or a lot of older Americans will die for reasons we have previously believed to not be major causes of death. That is going to create a lot of fear in the market and in everyday life. That will create fewer buyers and more sellers. I hate that these are the circumstances, but the next 40 years will not be America’s or the world’s finest. They are going to be rough and dirty to a lot of people. Prices will deflate.

As this occurs, the good ol’ treasury will start printing more dollars. As a matter of fact, the U.S. and Japan are the only two countries who haven’t started on a large scale yet (evidence is price of Euro, Pound, Dollar, Yen, etc, relative to other currencies). This will create inflation. This inflation will try to drive prices back up, but it won’t be enough. Either the treasury is going to create hyperinflation (massive inflation), or the treasury will fail and not print any more money (long term this is the wiser choice). We won’t have near the production capacity we once had at these price levels. Our infrastructure will take a massive hit over the next 40 years.

The U.S. has a lot of slimming down to do. I hope you are financial fit already. We are heading into a supercycle and there’s not much that will dampen the impact aside from genocide. It will get to the point of far more violence than we have seen since the wild west.

These are my predictions. I could be wrong, and I hope I am, but play the game as you see fit. There is always a loser and a winner of opportunity.

On the Election and Voting:

Don’t vote unless you know what the hell is going on in the politics scene. If you are uninformed, voting shouldn’t be your main concern. VOTING IS NOT YOUR DUTY!! Voting is a right that you have and you have a choice to do it if you want. If you feel like you are informed enough to vote, then by all means, vote. Don’t vote because someone has guiled you to do it. Don’t let your peers convince you that the world is hanging on a thread by this election, because it’s not. It really doesn’t matter who gets in office, or what office. Short term, long term, it doesn’t matter. If our leaders take us in the wrong direction and try to change the rules of the land, then it is our responsibility to take action in any way possible. Change is going to happen regardless. It happens everyday. This election is just one more change and in the grand scheme of things, it is fairly insignificant. Both Obama and McCain will lead, direct, control, and staff very similarlly. The country will continue on the course that is set. There are too many people surrounding these guys for them to make major mistakes. Some things will be different, but nothing will be significantly different. History will continue to repeat itself, don’t worry.

Hello Tim –

regarding future blog posts…

I took the jump a couple of months ago, abandonned the cold north for Spain. And… even though I really like life here, I am soo interested in a blog post on friends.. I know it’s supposed to be natural, but hey, it’s different to go friend-hunting in another culture, especially if you’re only there for a couple of months.

So, what are your best tips on how to get inside another culture and make some real friends? In a past blog post you said not to take language class just because of the social aspect, and analysing your past content it seems like you find sports a good way to connect. Agree on that, though I’m really no sports fanatic.

Bet you have something smart to say, as usual (no irony intended).

Keep up the good work!

Louise

To Hard Knocks Alum-

IMHO by far the best investment commentary presented. Way to sift through the dross to get to the heart of the matter.

PPC4

To Tim and All-

Investing is about maintaining and growing purchasing power. If you’re investments only track the growth of inflation, you have likely only lost money in terms of the value of the dollars you have to spend. A good essay was written by Ron Muhlenkamp on this subject: “Wake up America! You’re houses don’t make you money.” Maybe he’ll let you reprint it here?

Happy investing and voting!

PPC4

Y’know, just re-reading your post Tim, it reminded me a bit of Phil Town’s advice in Rule #1 on keeping to companies you know, or industries you are personally familiar with, and it also reminded me a bit on Covey’s ideas on not letting yourself get centered on the material (where your security goes up if it’s up, down if it’s down).

I like the shift in definition of the word “investment” as well, it really gets to the heart of why people are (allegedly) getting into money making in the first place – it’s supposed to be a means to an end, not the end itself.

Lastly, I always like to model everything on an in and out approach, whether its time management, investments, relationships, health, etc – remove what is wasteful and harmful, and keep only the best of what is beneficial (very similar to the 80/20 rule you talk about).

Great food for thought, thanks for writing this up!

Siraaj

With respect to some, not all, of the comments regarding Tim’s willingness to tell us who he voted for:

I can’t quote him exactly, but at my college graduation, Bill Clinton made a statement to the effect of, “I don’t have to hate him in order to disagree him.” He was referring to Bush Sr. I couldn’t agree more.

A trend I’ve noticed with very successful people is that they geniunely listen to those that disagree with them (it appears Tim does this, at least to some degree – correct me if I’m wrong Tim).

It is a shame that people will disassociate themselves with people that do not see the world ‘exactly’ as they do. My mastermind group (think Napoleon Hill) consists of a nearly equal balance of those that oppose and agree with me. Seems to work pretty well. Many great ideas can come from thinking outside the box… those that disagree with you tend to be outside your box.

Btw Tim, it takes courage to tell us who you voted for. I don’t agree with your decision to do this (no reason to detail why in this comment), but I definitely respect your choice to do so.

Hope everyone is doing well,

Nathan

(re) your comment that the Presidential election “is an A-or-B choice”, please allow me to retort … in a friendly sort of way.

A lot of people don’t like / want either one of the candidates in this (and many other) Presidential election. Instead of staying home and then kvetching about the lousy so-and-so who got elected, they always have the option of writing in a candidate.

A wasted vote, you say? There’s no chance a write-in candidate can win, you say? My rejoinder is that if more and more people start voting for “neither of the above” it may send a message that what we need / want are better-quality candidates.

Did I put my vote where my mouth is? You bet I did! (Again.)

At the risk of unleashing a firestorm of commentary (pro & con), I will reveal that I wrote-in William Jefferson Clinton — arguably the best U. S. President since Harry S Truman. I acknowledge that he’s not perfect, but at least Bill has leadership experience (which neither of the major-party candidates have).

Of course, most of us will never have first mover advantage when it comes to investing. But investing in the bank won’t grow our money to get us anywhere, anyhow. Conservative investments over the long term will only lead to conservative result, unless you live for 500 years. The only thing you are left with is investing in the best returning investments possible. Contrary to Mark Cuban, stocks are a better reflection of growth and, hence, returns than what you can get at the bank, or bonds or real estate, and how consistently shown that over time.

The only difference is how you approach your investing:

1 – Only use ETFs because they are cost efficient

2 – Use market volatility to your advantage. Use a volatility indicator, like the VIX, to monitor and exit the market when volatility rises. You don’t have to be in it 100% of the time to be in it for the long term.

3 – Use stops to protect your investments

4 – Focus on just a few ETFs as they already effectively diversify your investments

5 – Simple technical indicators like the MACD and Stochastics can be great tools to enter and exit positions when market volatility subsides.

6 – Follow growth. Accelerating growth produces returns (domestically or internationally).

Use your investments as a tool to get you where you want to go. Don’t become suckered into believing that if you do what your parents have done, you’ll end up on top. You have to make it happen! -CheapLee

“I voted last week in San Jose, and — to be honest — I was not overwhelmed by the brain power I saw around me, all due respect to those who actually made the effort.

The best-informed people, for some reason, seem to sit on the sidelines playing armchair critic while elections happen. That’s bullsh*t.”

Or, maybe there just aren’t as many smart people as you hope there are, and those that do exist just voted at different times than you.

How did you assess their brain power? By the way they were dressed? By the shape of their skulls?

Arrogant douche.

Hi Tim —

What you wrote in your post mirrors my own conclusions. The market now is basically a trading phenomenon. It’s possible to do very well trading and also to employ risk management . . . it gets harder each day to invest.

I traded one year and did very well, but had to give it up. While I made money, I created no value in the world. Now I invest in my own businesses.

Look forward to your next installment.

David

I still like you and your book but I think I agree with Drew. I wish you could hit it out of the park all the time, but thats life.

John

Tim – great article and references in your post on investing. One thing came to mind while reading it – your use of the word “investor”. I think in many instances, people you met were more “speculators”, and there’s an important difference there.

Hi Tim,

I liked this part more than the last one. Glad you brought up things like ‘information advantage’ and the quote by Mark Cuban. As for your ‘political’ statement at the end, if I may so, I would have worded it differently and maybe left it for another post. It’s not always a good idea to deal with things like politics in the public arena (it seems to have ticked off a few of your readers). However, I got the sense that you were stressing more on the importance of voting rather than voting for one party (in your case, Obama). We (by that I mean, we Canadians) will keep that mind, esp. considering our voter turnout in the last election was only 59%…

I think people confuse investing with speculating. When you buy a piece of a company ie. a stock you should want to make some profit off of your share. Your profit is known as a dividend, and for too long people have discounted dividends under the speculative, wall street con job, clap trap that stocks appreciate 10 percent over the long haul. This is nonsence and easily disprovable. If you would have taken the investment made in Manhatten (24 dollars) and compounded it from 1626 you would have a total many times the TOTAL money stock of the ENTIRE WORLD.

Divdends are what your after, but more importantly is what is money? Money is a future claim on wealth, stored wealth if you will. A 20 dollar bill is a future pair of shoes, a haircut, a hoola hoop etc . And how that medium stores its value for your future puchase is how good the investment is.

Currently T-bills yield what? 1-2 percent depending on the maturity when you factor in inflation at 5 percent plus, thats not a very enticing investment UNLESS you match against the 40 percent loss in the S and P.

A much better investment is in the stuff you use on a daily basis. You should buy as much as you can store and as much as you will use of items you currently consume, its only going to go up in value and if the whole world goes to hell in a handbasket you still have your hoola hoops, thats part one real stuff you’re going to use is real wealth, paper wealth is only worth the

Part two is you should invest in things you use in the PERCENTAGE you use them in (asset allocation). For instance, you spend approximately 20percent on shelter, you should invest 20 percent of your allocation into a REIT or an actual apartment building you own. Once your investment yield equals your cost’s of shelter you are effectively shielded from purchasing power erosion AND you don’t have to touch the principle (underlying stock) capital appreciation is a bonus. And in the case of a market meltdown, those dividend yielding stocks will hold up fairly well and the dividends of good companies keep comin in paying you to wait while someone else more qualified is trying to think of a way to make a profit on your shoe, food, REIT capital allocation.

You like to travel alot and energy is a key cost component of travel Tim so you should have a healthy allocation of energy stocks which are quite cheap right now and have a very healthy yield (esp.canadian oil trusts, pipeline trusts PWE, HGT, BP, Eni, etc.). And since you have experience with different countries. Your investments should also be diversified out of the dollar in an allocation which reflects your travel/living practices in a country you would be buying your goods and services IN or FROM.

Eat at Mcdonalds alot? Buy the stock until the dividend yield pays off your junk food addiction (dividends generally rise with company profitability).

Of course the best investment you can make is in yourself. Namely, learning a new profitable skill (book authoring, real estate investing, internet marketing etc.) is the highest yielding and steadiest paying investment you will ever have and I would also add that the more you have control over an investment the more money you stand to make.

Generally speaking dont get caught up in all this “inside tip” speculative garbage, the true long term investers look to buy profitable companies for their actual yields and do not rely on the “greater fool” principle of speculative investing.

Hi Tim,

Fellow Gracie-Barra Brazilian Jiu-Jitsu brown belt here, so I know you’ll be listening to my thoughts about investing with particular attention. 😉

I’ve also spent the better part of the year studying investment, and have read most of the same books you’ve read. On that, I’d like to second someone’s recommendation above to have a read of Harry Browne’s “Fail Safe Investing”, in which he prescribes a recipe for a “permanent portfolio”, which should provide safety, and usually profit, in any conceivable economic condition.

Almost all the investment books I’ve read attack the problem of investing by looking backwards. They identify asset classes, look at their historical cross correlations, construct model portfolios based on the owner’s “risk profile”, run monte-carlo analysis against them using their historical statistical representations, and attempt to find the “efficient frontier”. This seems fine to me, if the future is likely to look like the past.

Harry Browne’s approach was, on the contrary, forward looking. He began with the assumption that nobody can predict the future, and defined as an objective that the ideal portfolio should provide safety and profit regardless of what the future brings. He identified four general states of the economy—prosperity, inflation, deflation and recession—and selected asset classes that respond the best to each (stocks, gold, long-term US government bonds, cash), and from those built an equally weighted (25%) portfolio that he called the “Permanent Portfolio”.

Taking this portfolio, and then looking backwards, it’s done very well, providing 9% to 10% per year. Even in the current financial crisis, it’s provided the most protection of all popular portfolios tracked here:

http://tinyurl.com/6h8qdt

For more information, here’s a thread on the Bogleheads forum where you could start:

http://tinyurl.com/6lfd39

(This thread references an older, huge thread on the Boglehead that goes into much more depth on the permanent portfolio, including things like tradeoffs between holding physical gold or gold ETFs.)

Kind regards,

— 

Matt Henderson

Tim first off I would like to say your book was amazing I feel that it has actually changed my life forever. I seem to be applying the 80/20 principle to everything I do. I totally disagree with your choice for president, but we could debate that point forever. Also through my own personal expierience I think it is great that the American public go out there and vote. However what I dont condone are people who have no knowledge and have done no research on the canadate they claim to support. I feel these people have no business voting it is completly redundent. I do encourage people to research each canadate so they actually have a reason to vote for them other then they sound good in the public spotlight. Another thing the bugs the hell out of me are organizations such as Acorn going around and regerstering people to vote. Obviously if you cant even register yourself to vote you have no business doing so. And I dont mean to single out Acorn there are probably many right wing organizations doing the same. Other then that I really hope that after college I am able to succed in running my own automated online business. So for now I will refrain from mentioning any more about politics, sex, or religion because that can only lead to trouble.

Keep living the dream,

-Trav

I vote for the mind and the energy, not the party.

Hi Tim–

Thanks for the book recommendations — and for urging people to vote.

Hello everyone,

I have followed this blog with great interest. I decided to make a post on this subject because I believe I have had a great deal of success in this area.

A little about me. I own 2 private companies The first is a property investment and development company that operates in several countries. The second structures property investment deals on behalf of investment group such as pension funds and institutions. I also have a large stake in a niche online marketing company with a wide client base throughout europe. This company is much smaller than the first two.

All of my companies are successful, cash flow positive and are still expanding.

I have been a coward and not named any of them in this post so many of you may not take my post seriously. I have done this because my views on investing in this post may be contrary to my clients views.

I have been lucky over the years to have some excellent mentors on the subject on entrepreneurship and investing which I will explain to you below:

1) I only invest in a deal/project in which I have a massive comparative advantage. I would even go as far as to say that in the deals I pick I am almost the only person that knows every angle about the deal. I can give examples below. A good saying ‘some people hope…I make sure’.

2) I never use my own money to invest in a deal/project. If I use leverage to invest I never give personal guarantees. Most of you reading this will say ‘that is impossible when borrowing you need to give personal guarantees’. Not true if the deal is good enough you can always put a deal together without personal guarantees. You just need to put the correct security in place. The person lending you the money does not always need to be a bank. My mentors would always say ‘if its not bankable we don’t do it’. By bankable they meant ‘can we borrow other people’s money to invest without personal guarantees’.

3) Dont invest in something that has the potential to wipe all the gains you have made in your past investments. Now if you have followed the top two points that should be impossible. Try to keep deals separate by placing them in separate limited companies. But mostly this refers to your personal integrity when doing a deal. Dont make a deal/investment that can potentially ruin the confidence of your funders in you.

The above is good advice.

Now onto methods of investment:

1) I would never investment any significant amount of my net worth in the stock market in a passive format. My reasoning is that the market is far too efficient. I.e. there are far too many bloomberg terminals which display huge quantities on information on every aspect of the listed companies. If the company has potential for growth, the growth of the company is already reflected in its price. My earnings will only ever be as good as everyone elses. Ok there may be a bull market for a few years…but this is luck. Again I dont hope… I make sure! Furthermore I would not ‘trade’ the stock market. i.e. try to second guess the market and try to make money trading in the short term. This is no more sophisticated than online poker, I know very few hedge fund managers who consistently make good returns over 5+ years. The one exception to this is when you have the ability to actively control the board of a given company. We have done this we AIM listed companies where we have purchased a significant amount of stock of a company to be given voting rights on the company. We were able to take the company private then change the way it did business. At this stage we knew much more than everyone else and were able to make a massive return.

2) Invest in what you know very very well. Warren Buffet actually began by taking comparatively large stakes in small companies that he could impose huge influence. This is something very different from every day people who treat stock as a piece of paper gable. He is also left very little to chance, he began reading company reports since he was 11 and always visiting the board of every company.

For me my main expertise is property investment in eastern europe. Before I buy a piece of land I already have the person I am going to sell too lined up. I know all the local official and councillors who can affect the planning permission on the site. I also am in regular contact with the highway commission who will explain to me on my likelyhood of achieving favourable highway links in the years to come. No other person has the same knowledge as me on this region. A hedge fund manager in London with a bloomber terminal has no clue on the true value of that land! The market is not efficient! To everyone else the site I have bought seems a reasonable price, but with my inside knowledge I know it will be worth 1000% more once I have added value.

3) I love investing in private start up enterprises. Most of the time I put up no capital what so ever I just give them my expertise, ‘sweat equity’ and contacts in a give industry. I put up no capital and gained an excellent equity stake in the company. Again I only invest in companies that I have huge experience in. This also works by introducing the entrepreneurs to potential sources of finance for a ‘carry equity stake’. I stick to backing start up property investment companies, property service companies, and advisory businesses to institutions.

How did I acquire a large stake in a successful marketing and seo company? My property companies had hired a well know SEO and marketing company to handle our campaigns. One of my staff had the role of liasing with the company every week to ensure the SEO and marketing was going well and to handle the payment to the company. I realized that my staff member understood everything this SEO company was doing and in some cases was handling the process better than the company we hired. He loved the handling the campiagn. I could see that the SEO company was making a massive margin for relatively easy work. I suggested my employee (John) stopped working for me and start his own SEO + marketing company. I gave him contacts in eastern europe who could work at a much lower cost per hour than the USA SEO competitor. John never looked back his company now grosses $800,000 per annum and I have a 25% stake.

4) Remember why you are investing! The idea is to put money into something now to get a greater amount of money back!

Sometimes it is a better investment to reduce the burden of you current debts or spend your money more efficiently to achieve the same level of happiness in your life. Mark Cuban’s blog on point 4 is excellent.

I hope this post was interesting.

Hey Tim,

Here is a great article by author Neal Stephenson. In it, he mentions his “Four Hour Time Slabs,” and how important those four hours a day are.

http://www.drzoltan.com/blog/2008/11/09/neal-stephenson-why-i-am-a-bad-correspondent/

-Dr. Zoltan!

THE ZURICH AXIOMS BY Max Gunther has some first-rate counterintuitive investment advice. It was out of print for years, but its wisdom such that old copies sold for hundreds of dollars each (a slim book under 200 pages, mind you). Publishers obviously noticed this demand and brought it back into print in 2004. So it’s again affordable, and I’d say worth a look. A bonus is the writer is very readable and often amusing. I’d even argue that it’s somewhat a companion book to THE FOUR HOUR WORK WEEK.

Hi Tim,

What about Ron Paul?

1) Honest

2) Principled

3) Peace

4) Prosperity

5) LIBERTY

Please let me know what you think of him, I know a lot of us here respect your opinion. Ron Paul’s continuing revolution needs key influencers like you.

What do you think of the Campaign for Liberty?

This investment advise is about 140 years old but it is true today.

“Anybody who plays the stock market not as an insider is like a man buying cows in the moonlight.”

– Daniel Drew, 19th century speculator and Robber Baron

Thanks for reminding us of this investment advise.

Angel investing is the way to go. There are many small startups that are doing great things on a shoestring. Helping these folks directly helps the US economy and the returns can be amazing. Risk is there but I think it is less than in the stock market averaged out over the years.

A new Michael Lewis article that updates “Liar’s Poker” with thoughts on the sub-prime mess.

Gotta love Mark Cuban’s BRUTAL honesty in that quote. hahahaha