Successful “investing” requires some uncommon questions. (Photo: Me at Burning Man ’08)
“If the market felt fidgety, if people were scared or desperate, he [senior Salomon Brothers bond trader] herded them like sheep into a corner, then made them pay for their uncertainty.”
–Liar’s Poker, Chapter: A Brotherhood of Hoods
There were 4-6 screens per person, and chairs were lined up at a single 30-foot desk in hierarchical pecking order. Commands would come down the line and trades were made.
“Who the f*ck are you?” asked one of seniors, swiveling back to his glowing screens before I could answer.
It was my first time inside one of the largest investment banks on the planet, and I was just observing a friend in the hopes of learning something. Before I knew it, lunch had arrived and a 20-minute break was announced in a poetic slew of 4-letter words.
“Name a company.” It was a voice I didn’t recognize, but it was clearly directed at me.
“Uh… sorry. Excuse me?” I asked to the room and no one in particular.
“Name a company.”
“Any company — doesn’t matter.”
“OK. Ah… Genentech.” It was a shot in the dark with no rhyme nor reason.
“F*ck Genentech!!!” came the chorus.
“OK, we just sold 100,000 shares of Genentech. F*ck those guys. Lost a ton on them last week.”
100,000 shares of Genentech sold because a no-nothing guest had pulled the name out of thin air.
That was my introduction to how truly rigged the stock market is…
“One trader remembers that Lewie [head of Salomon Brothers’ mortgage department] would say he thought the market was going up, and buy a hundred million [dollars’ worth of] bonds. The market would start to go down. So Lewie would buy two billion more bonds, and of course, the market would then go up. After he had driven the market up, Lewie would turn to me and say, ‘See, I told you it was going to go up.'”
–Liar’s Poker, Chapter: The Fat Men and Their Marvelous Money Machine
I currently have less than 10% of my net-worth in stocks. Why? I don’t have an “information advantage”. If other words, I’ve seen the sharks in this ocean, and I want no part of it. They’ll eat my Barron’s-reading ass alive. 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.
To quote billionaire Mark Cuban (great blog here) in his short interview with Young Money (YM) magazine:
YM: Do you have any general saving and investing advice for young people?
CUBAN: Put it in the bank. The idiots that tell you to put your money in the market because eventually it will go up need to tell you that because they are trying to sell you something. The stock market is probably the worst investment vehicle out there. If you won’t put your money in the bank, NEVER put your money in something where you don’t have an information advantage. Why invest your money in something because a broker told you to? If the broker had a clue, he/she wouldn’t be a broker, they would be on a beach somewhere.
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.
Discarding luck as a strategem, and personally discarding better analysis because I don’t want to spend my life poring over annual reports or evaluating algorithms, there is a simple conclusion: don’t invest in anything that you don’t know inside and out better than most of the world.
From David Swensen, who ended 2007 up 28% as the investment manager of the Yale University endowment:
“You have to diversify against the collective ignorance… I think nobody is in a position to react to these big macro-issues. Where is the dollar going to be or what is G.D.P. growth going to be in China? For every smart person on one side of the question, there is another smart person on the other side.”
Having come out of Princeton and the land of Burton Malkiel, I agree with efficient market theory insomuch as “information advantage” is a prerequisite to consistently getting better returns than average.
If you don’t know something the rest don’t, don’t gamble.
The Weasel Word: “Investing”
In part 1 of this series, I promise my favorite picks for investing books. Though I’ve read several dozen based on recommendations from self-made millionaires (I try not to take advice from speculators), here are the few I’ve found most useful:
The Essays of Warren Buffett: Lessons for Corporate America (Buffett)
The Smartest Investment Book You’ll Ever Read (Solin)
Liar’s Poker (Lewis)
Seeking Wisdom: From Darwin to Munger (Bevelinl; Parts 2-4)
Less is More: An Anthology of Ancient and Modern Voices Raised in Praise of Simplicity (VandenBroeck)
What?! It seems like philosophical books have been mistakenly put on this list, no? Here’s the rub: after all the research and mind-numbing number crunching, I’ve decided that the philosophical decisions take precedent over the tactical ones. For me and those whose lives I most admire, at least.
One qualified commenter on the last investing post said:
“I don’t think you’re going to figure out investing in a matter of weeks or months.”
Well, this brings up an interesting question, doesn’t it. What the hell is “investing”, exactly?
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”?
Is a stock with a projected 25% annual growth rate over 10 years a good “investment”, even though it will lose value every year except for one undetermined year with a 259% increase?
I sat in on another friend’s job once. He was a day trader, and his boss made more than $50,000 per day in most cases. But, this boss also carried divorce papers in his briefcase 24/7 “just in case he’d had it with the bitch.” Do you want his life? Is he a successful “investor”? Be careful with that term.
In the 100+ comments on the aforementioned post (some of the commenters manage 9-digit funds–hundreds of millions of dollars), definitions of “investing” range from “gambling” to “asset allocation.” In other words — “investing” as a term is so overused as to have become meaningless.
I propose that we define investment as a broad concept and then separate it out. First, the broad definition:
Investing = “Allocating resources to improve quality of life.”
This applies to financial investment as much as it does time management and all other resources. How much would your behavior and results change is you just replaced the concept of “time management” with “time investment” in your head?
Using this definition of investment, I would not chase the moving target of pure ROI (after all, there is always a more speculative vehicle with potential higher gains), but choose the vehicles that offers the greatest ROI with the least insomnia. More cash with constant sweat in the palms is hereby defined as a poor “investment.”
Moving from conceptual to tactical, we can also separate “investment” into three categories of actions, which I’ve found useful:
[To be continued…]
Did you miss Part 1 of the “rethinking investing” series? Read it here.
I get really, really pissed when smart people don’t speak out. (Photo: Me at Burning Man ’08)
The Tim Ferriss Show is one of the most popular podcasts in the world with more than 900 million downloads. It has been selected for "Best of Apple Podcasts" three times, it is often the #1 interview podcast across all of Apple Podcasts, and it's been ranked #1 out of 400,000+ podcasts on many occasions. To listen to any of the past episodes for free, check out this page.
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129 Replies to “Rethinking Investing – Part 2”
Wow, really liked both parts of this post and the photos too. Hearing Mark Cuban’s quote is an echo I have heard from other billionaires and I appreciate the reminders. I also like your responsible approach to the vote and I agree: people with a bright brain need to get out, vote and excercize the right people have died to give them!!!
By the way, I am new to blogging and how it all works. Not sure if you saw my previous post, I just had a quick question about your biz: why is it not “sellable” as you said in your book? Is because it is an internet based biz, or some other reason? Thanks for your time, all the effort you put into coming up with interesting blog topics and for your being as specific as possible with your answer.
Loved the book, told everyone about it and gave another copy to a friend today!
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.
I think some people like to “invest” because they like to feel that they’re “doing something” to improve their net worth. It’s nothing more than an extension of the gambling reflex.
You’re right that you have to have some edge, informational or otherwise, and if you don’t know what it is, you don’t have one.
Two other books I thought I’d throw in are:
Why Smart People Make Big Money Mistakes And How To Correct Them
The Zurich Axioms.
Sorry no links, I’m a bit of a net noob so I haven’t figured out how to put them in yet. Those books give you some idea of what to expect but better yet, give you some inkling if you’re cut out to actually engage in the activity of investing!
Why not vote libertarian? You certainly seem like one…
After a tip from a friend I read your articles on investments and think you have come to the correct conclusion.
A lot of the strategies that hedge funds and banks use to trade their own assets involve beliefs about valuation models, distribution assumptions, correlations and so forth. For them, arbitrage is much more important than stock picking.
Furthermore, banks and bigger institutions can leverage their bets, i.e. they can lend money to invest it and, with that, multiply their original returns. Also if you have a very high risk appetite, the concept of doubling down is widespread (If one bet goes array, just double your bets on the next one – you probably won’t make a wrong guess 1000 times in a row). If you had unlimited capital – you could never lose. This is what some (rogue) traders forgot.
Your quote from liar’s poker might sound like some traders run wild and manipulate the market day in and day out. But over the last decade their influence has dwindled. There are now many powerful players that use similar models and spot each others movements fairly well.
The old angst that brokers would systematically screw you on your orders has also been largely mitigated by modern trading systems with realtime orderbooks and automatic execution etc.
A note of caution though – every successful investor might have a good story of why he won. But if you think about investment success as normally distributed (with a weak form of the market efficiency hypothesis) then, by design, there will be a few very big winners and a few very big losers and lots in between. (the same happens if you let apes throw darts at the investment page of the WSJ to find your portfolio or do some coin tosses).
Warren Buffet, Peter Lynch, etc. are beyond a shadow of a doubt very intelligent. However, they might just be lucky after all- as far as their stock picking is concerned.
As for angel investing – this is a far better field for people coming from the “real world”. However, keep in mind that everywhere where there a great returns promised there is bound to be high risk. Your competitors for “insider” information are on a very high level and companies are often searching for the big brand angel investors to attract new ones (“If Larry Page/Goldman Sachs/KKR/… gives them money…”).
Anyway, good luck with your ventures!
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.
Personal Development Blogger
I think this falls into your category of do the opposite of what every one else is doing. I have only a few friends who are Angel Investors- and they all do quite well. I have many many friends who invest in stocks and well…there not. It makes total sense to me that if you don’t have an ‘information advantage’ stay out of it. On another note- Burning man looked like it was off the hizzay!
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…
interesting that investing is your new interest. I started investing some 8 years ago when I was in new economy venture cap firm. And it was easy: the guys from forrester research & co. made a prognosis mistake on which all nasdaq valuations were based on: the mistake is the same over and over again: people, especially expert people think that patterns from the past last eternally – in that case it was the exponential growth of internet usage. they simply forgot that internet usage was dependant on pc usage or as it was called at that time – internet and pc penetration. and so it was a typical value-price difference. and it was in october when I former colleague of mine, formerly a mc kinsy consultant asked me: …but this now must be the floor, isn´t it. My response question was: do you really think that a company like yahoo will grow as much in future that a price / earnings ratio of 890 is justified. the answer to my question was a clear no! So I think people can think but when it is about stock exchange they often forget that. So may be investing is just finding differences between true values and prices on stock exchanges or other markets (so this is the simple basic idea of value investing). And isn´t it so that the simpliest ideas are often the best?)
But Tim, my question to you: You write in your book that you spent some time in Berlin. So could you please help me with a short answer. Do you know VA Virtual Assistant agencies in Germany? Or German speaking ones? Or could you recommend something else for executing the VA concept in Germany? Would be nice if you could help me.
And here an invitation: As I am working on an internet platform with german hiking trails: if you ever feel like hiking in wonderful german nature –> please feel free to tell me. I would find best hiking trail and hotel for you, pick you at the airport in Berlin and fly with you on one of the German Autobahns with over 200 kilometers per hour (proposed vehicle: Jag XJ 8). Speed & Nature, could be fun for you. Just let me know… best wishes from Berlin, Germany, HM Weiss.
P.S. Shares of German carmakers BMW and Daimler are sinfully cheap at the moment! Price / earnings about 7! BMW significant under equity!
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!
Information advantage is a crucial component in earning money anywhere. One book that I really enjoyed reading is similar to Liar’s Poker, it’s called Trading With The Enemy and it’s about the experiences of someone who worked at Jim Cramer’s hedge fund.
One of the best stories in there is about how analysts would sometimes tell Cramer about a downgrade a few minutes before their official announcement. Cramer paid 6 cents a share on trades, way more than regular investors, but he was given an information advantage that was impossible to for the SEC to track and gave him a serious leg up.
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.
Thank you. Read your post and felt dread when I heard the “information advantage”, and about the fixing. The way you structured your argument was likely sound, but it had the affect on me of avoiding investing in the stock market at all, so then any interest in the reading the books you suggested seemed lost. I will do my part on examining your post again later. Apparently, my flight response was triggered. You content is usually very informative, so forgive me for suggesting that when it comes to a sensitive subject like this, you might want to define who your target audience is. I am an educated, intelligent, positive and energetic 40 year young entrepreneur, but you scared ME into really thinking about slipping out of the stock market entirely.
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.
3rd Strike Tim – you’re out. I’ve read your book…I’ve read this blog…and I’ve commented here when I see you state something that is completely out of line with my own experience, with historical experience and with experience of people who have authority on the given matters you are commenting on ..and lastly – with overall results and good judgment.
That you, who supposedly understand our enemies, understand entrepreneurship, and understand the marketplace are supporting Obama is utterly and completely ridiculous – and here’s why: Either you don’t understand these things or you’re concerned what those in your marketplace believe and you’re playing to them. Let me expand on this…
…In order to get a firm grip on reality in the world and in the marketplace to understand what’s actually happening (not what people are just telling us in order to influence our decisions and perception) it’s important to watch what people do – NOT what they say. Tim – you made a # 1 NY Times Best Seller. What people who make that list have done is pretty amazing; they’ve mastered an art in telling people what they want to hear. Rarely – that book/author may also have imparted words that tell the reality of the world and marketplace also. I gave you that benefit of the doubt as you had some great advice and commentary. So the question came down to – are we listening to someone telling us what we want to hear – or is this a watermark as to what’s actually happening out there? There are several statements from your book and blog that made me take that step back ..and this one (plus 2 others in your blog) have cemented the reality that you’re telling people what they want to hear because results simply don’t mete out what you’ve stated as fact… I’ll let the readers of this blog figure out what and where …and just do a search on my posts and you’ll see what I’m speaking of… but further, our enemies around the world are hoping we elect Obama …because it will play into their favor. You can talk all you want about how we’ve suffered in the eyes of the world – but our enemies are all that matters. It’s like poker – people love you when you’re losing – but they hate you when you’re winning. So if our enemies hate us – and the world hates us …it’s because they want what we have (and it’s the reason why so many people are trying to get into the country – they want a piece of that same pie.) … so electing a patsy into the game, telling everyone what our cards are – plays right into what “the world” wants …enemies, friends ..you name it. Tim – you either know this or – if you don’t – then you simply DO NOT have an understanding of the world and how it works (and my guess is you lose at poker quite often)… or, as I believe, you’re just a guy who figured out a marketplace of guys like me who get technology, get a simple lifestyle of experiences (not possessions) and get freedom overall… and my guess is – guys in my lifestyle don’t get poker and how it works in geopolitics … and your’ just telling them what they want to hear. If that’s what my “demo” is … deal me out of it and I wish you fools well. And fools you are – you’ll soon be parted from your money.
One last thing – when an elected official is in line with a propaganda cabal (read: the media) – and an average citizen is investigated and attacked for ASKING THAT OFFICIAL A QUESTION – then it is your duty as a citizen to vote against that party/official as a referendum against the media cabal. To not do so is complicity in creating a juggernaut-structure that is unstoppable… just as the German people did that elected Nazis to power.
I wish all of you well – and never forget – the moment you start buying into the hype of those you follow – is the moment you’re lost.
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.
My attitude to public stocks has been to not invest because:
1) I’m not going to kid myself that I understand enough about the markets any time soon
2) I’d not want my investment to be vulnerable to something so sentiment-led
3) Once invested, my investment is out of my control beyond the ability to buy and sell
I’m all for Mark Cuban’s comments.
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.
Buenos Dias, Hi Everyone!
Wow, seems like the other post helped to clarify your take on investing. Sure, invest where you have insider knowledge and connections that others don’t (it isn’t the path of the least resistance, but rather a path which can strengthen your confidence in decisions). I agree, what is important is having information advantage and even if we don’t have it all the time, one can be wise in teaming up with the right people to have that information advantage.
It was interesting to read some blog comments in your first investment article, the term “investing” was interpreted in so many ways, I admit it was a bit overwhelming but insightful. At the end of the day, investing in general is best distinguished over time and at the preference of everyone’s taste. Overall, it’s an awesome thing to keep to our commitments when playing hard ball and not lose credibility.
From my perspective, the sweaty palms at night isn’t always a wrong choice, it comes with territory and the learning process, whereas we grow from new challenges (possibly in a known territory) and extend ourselves to new heights. You do a lot of that…at some point, sweaty palms might come to some or not (from experience) at other times. My personal feelings about that, I feel it comes down to the degree of confidence one has and whether one can accept the consequences of a particular decision.
But I get what you mean when you insert a comment about the sweaty palms. And yes, I like that you make it a point to have us think about our values in connection to the degree of work we do.
I saw this cool comment on a guy’s shirt in one of my business classes, it said “Don’t sell your liberty to gratify your luxury”. It’s something to ponder about, just putting that out there.
You’re doing a great job!
Thanks for the list of book recommendations.
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.
Not sure i understand the link between your desire for more government regulations and a four hour workweek. Self employed need less regulation, not more. Regulate wall street, not start ups. McCain gets my vote as i also dont want my wealth spread around…
“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.
Not voting is actually the strongest way we can register our displeasure with our current crappy near one-party-rule election system. Not only has no election ever been decided by one vote, but if you do vote for someone it is a positive affirmation and endorsement of their actions for the next four years. If you do not want to live with that then Don’t Vote It Only Encourages Them.
When everyone is convinced the stock market offers no opportunity, then the opportunity will be greatest.
I like your idea of “time investment” as you can make more money, but you can’t retrieve wasted time.
Emerson said, “Guard well your spare moments. They are like uncut diamonds. Discard them and their value will never be known. Improve them and they will become teh brightest gems in a useful life.”
Thanks for reminding us how precious our TIME is!
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:
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.
It’s interesting that people most affected by his tax increases are also endorsing and voting for Obama, but yeah, I think you hit the nail on the head – can’t necessarily agree with everything, but long-term prospects are better with him rather than McCain.
By the way, awesome wordpress blog you got going here, who does the design for it?
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.
The information edge becomes less critical as assets become less liquid, and as investment time frames get longer. If you buy for a 20-year holding period, you have a huge built-in edge, but an emotional one, not an informational one. No one else can stand to wait that long.
The information edge is also not necessary if you find ways to buy so cheaply that investment yield is satisfactory, and speculative gains come free.
Investing: buying an asset that generates a yield (income).
Speculation: buying an asset in the hope it will be worth more someday.
Most money gambits are some combination of these two, but the consistently successful plungers find ways to speculate for free. This means buying or building assets cheaply, compared to the yield they generate. That way, any speculative gain is gravy, not necessary to survival.
Say you build a brain supplements distribution business around a Web store, Google ads, and contract manufacturing. Your up-front costs are nearly zero, so the yield (income to asset ratio) is very high, say 100% per year. Maybe you can sell that business someday, or maybe not — that’s a speculation, but a free one, because the direct yield on the original investment is so high that you don’t care if that lottery ticket never pays off.
Are apartment buildings mainly a speculation or mainly an investment? Depends on the price you pay. If you buy the building for 20 times gross rent, then your rental income doesn’t cover the mortgage. Thus, unless the building price goes up, your return is negative. Pure speculation. But if you instead buy the building for only 6 times gross rent, you will generate a net income on the rent after all expenses. A yield on your investment. By contrast, any future gain in the price of the building is gravy. Free to you. A free speculation.
As another example, say you think PayPal is an undervalued business asset. If you buy eBay stock in the hope that PayPal will someday be spun off or sold, then you are speculating. On the other hand, if you notice that eBay currently trades at only 10 times earnings (net earnings yield 10%), then you can buy eBay for the yield, and enjoy the PayPal spinoff speculation for free. If it doesn’t spin off, you don’t care that much, because a 10% yield is not bad.
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.
Great post, Tim.
You are so right about redefining the term “Investing”. Sometimes semantics is far better analyzing stock markets.
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!
Absolutely! Why is the term “investing” automatically translated for some people as “stock investing”? Learning a new skill might or might not be a career investment. Buying a property might or might not be a real estate investment. Reading the 4-hour work week might or might not be a life investment. Buying a $2 rose to your girlfriend might or might not be a relationships investment. So yeah Tim, thanks for clarifying this term 🙂
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 😉
Great post, Tim!
I’d add one more book to your list of recommended books: Fooled by Randomness or Black Swan by Nassim Nicholas Taleb (the two books have quite a bit of overlap.) I think if one has the patience and temperament, one could profit from the market by waiting patiently, and profiting from major shocks such as the current financial crisis.
I would also recommend Professor Roubini’s blog (http://www.rgemonitor.com/blog/roubini/) — a brilliant economist who has been right on many fronts with respect to the current financial crisis.
You’ve been an inspiration for me and many of my friends. Keep up the good work!
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.
“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,
I was wondering how you felt about Cuban’s advice as it (seemingly) contradicts what Warren Buffett had suggested to you… “I’d put it all in a low-cost index fund that tracks the S&P 500 and get back to work.”
Of course Warren Buffett has far better information than most of us, and of course can move the market on any security at will, as can George Soros.
@ 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…
Maybe while at Princeton you could have sat in on a lecture from Professor Malkiel or at least picked up his book (maybe you did?) and come to the conclusion that while “beating the market” is a fool’s errand at best, riding the stream of the market can in fact get you where you want to go, provided you have the time and the ability to withstand the occasional groin-shot.
Tim, you seem much more interested in investment concentration than diversification, and you are right if your goal is jump from six figures to eight. But real returns are able to be had by the investor who knows the limits of the system and is not interested in gambling or speculation. Trust me, poker is a much more entertaining and challenging game anyway!
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.
Help me out here Tim. You say “to beat the market consistently……” What if I don’t want to beat it, what if I just want to ride it? I’m 33 years old with a modest 401k. I get maximum company matching at a 6% 401k contribution, and take home just enough for my wife to spend and the kids to eat and go to school – not much left over for day trading, or even Roth contributions. Granted, my investment options are limited, but what else am I going to do with my 401k until I can reap the benefits without taking a beating in taxes. Right now it’s sitting in a range of index funds, the riskier ones that are available, because I’m not going to touch the money for a while and can “afford” the risk at this point in my life. I expect that I’ll average anywhere from 8-15% per year over the life of my investment, and if it happens to be 5%, that will work too.
What would you do?
I’ll admit that I’m probably not the target audience for this post, but maybe I am…
Would love your thoughts.
Anyway – thanks for your insight
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.
This is the most useful, practical and insightful post that I can remember from your post history. Good work!
“CUBAN: Put it in the bank…NEVER put your money in something where you don’t have an information advantage…If the broker had a clue, he/she… would be on a beach somewhere.”
If so much hinges upon who wins the election why do you care more about me voting than *who* I vote for?
I am a fan of your work, but I think you need to simplify your thinking.. In your breakdown of investment, you describe three modes Asset/wealth creation, Asset/wealth allocation and Asset/wealth preservation
IMHO there are only two: wealth creation and wealth preservation.
Most of the books you buy at the book store, or the advice you get from your financial planner or the advice your Granma gave you about investing is all about wealth preservation. For wealth preservation you don’t need an information advantage. You just need to diversify your assets among the usual instruments such as cash, real estate, bonds, index funds and value funds like Berkshire Hathaway,
Wealth creation is a totally different beast. It is about specialisation and taking a calculated risk on something which you have an information advantage in. It could be about day trading, flipping real estate or selling online.
Wealth creation is about picking something that you know initimately and pushing yourself well outside of your comfort zone to maximize your returns. Toyota knew this and this is why the US car industry is no longer the industry leader. The US car industry spent its whole time trying to perfect the process of manufacturing cars. It was very expensive and ended up with cars with far too many bells and whistles and a big price tag. The Japanese worked on a different paradigm, The Japs simply just sped up the production line and when something broke they fixed it and got on with the job of producing new cars faster and cheaper than anyone else. You need to have the same mind set with wealth creation. Pick something that you have a passion for and feel you have an information advantage in and then find a way of speeding up the process. This might mean, for example, quitting your day job to flip houses full time.
btw. If you want to get a better handle on this read the “Zurich Axioms”. It is written by a Swiss banker and is available for free on the internet at http://neif.org/Zurich_axioms.pdf
your video re Obama is not longer up
can we see it elsewhere
Oh I forgot to add, that in addition to: “Picking something that you have a passion for and feel you have an information advantage in and then find a way of speeding up the process.”
You need to think about how you can do this in your four hour work week. For example, if you quit your job to do up and flip houses for a living, you have just replaced a 40 hour work week with a 60 hour work week. Sure you will make much more money, but your quality of life will go down.
What you really need to think about is how you can speed things up using the principles from your 4 hour work week book. i.e. find ways to eliminate, automate or delegate parts of the process.
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.”
Investing: You’re right. What is the point of an investment if it’s so risky that you can’t sleep at night. The truth is that our current fiat money system has the dollar in a downward spiral that will never fully rebound. Inflation is inevitable and there will always be an “appreciation” of commodities. My favorite commodity is housing. I buy foreclosed homes. They have a benefit in good and bad times. “Good times” for real estate meant appreciation – 2001 – 2005. “Bad times” – Now – allow me to cash flow enough to pay all my bills without the worry of values falling. Still doesn’t make me want to spread the wealth, that I worked hard for everyday.
Election: Shocking. Typically smart people understand that income re-distribution (socialism) has and will continue to fail in all instances. I can’t say that I understand people who have any faith in the government, but I’m assuming W.’s incredible ineptness and huge deficit spending has blurred the lines here. The fact that he has acted more like a liberal than a fiscal conservative has nearly destroyed the party and left us with a moderate who’s running against a far left wing socialist. The moderate has about 1% of the people skills that the left winger has, hence I’m not shocked at many folks being enamored with his Jimmy Carter rhetoric.
Tim, You are officially the smartest person I know voting for him. I’d love to hear more about why, so if you’re ever in Chicago, look me up. Dinner on me and I’ll put you up in any hotel (or my place) you want. As always great stuff here, and I still love all your stuff.
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.
Related to investing, voting and Joshua Blank:
With respect to Tim, I think Warren Buffett is certainly the richest and possibly the most intelligent Obama supporter, with an estimated IQ of 180+.
I’m dumber than either of them, a lifelong 5th-gen Republican, business owner, Ivy League MBA, but voting Obama. Why? There are worse things than redistribution. I liked small-government GOP, but that doesn’t exist any more. They are now too spendy and invasive (privacy, personal liberty) to earn my vote.
Reagan put it best in 1988, ironically when talking about why he abandoned the Democrats: “I didn’t leave my party — they left me.”
[[ 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).
I would second the suggestion that you read “a random walk down wall street.” He introducing the “sleeping scale,” and says that if you want to sleep well at night, you have several options.
If you want to sleep well, but also make a bit more than a bank account, a nice mutual fund of MUNICIPAL BONDS will do nicely. They pay better than a bank account, are almost as safe as a FDIC insured account, and in many cases you don’t pay taxes on your earnings!
You also might want to look into getting the “Consumer Reports Money Adviser.” Money advice in a magazine that doesn’t take advertising, and isn’t trying to sell you anything. Its about 20 pages a month.
Perfect for those on a low-information diet 😉
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.
@j caspian. Methinks you’re a little paranoid – *enemies*? Those of us in the rest of the world have some interest in who is elected US president, but really, I think you are overstating how many of us actually spend time worrying about it – we’ve all got our own backyards to think about – oh, that’s right – you won’t get this message now as you’re no longer reading this blog…
Great message Tim – having been taken for a sweat inducing ride previously in an ‘investment’ scam and losing a considerable sum of money, the ‘Information Advantage’ takes on new meaning and is certainly a prerequisite for us these days as is making sure we are in the drivers’ seat. For us this means; real estate – something we know and love, some blue chip high yielding shares in well established companies with future surety and growth potential and investment in our own businesses.
@Maria|never the same river twice – Kudos for your sentiments – totally aligned with my own thoughts.
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!
Excellent article. As I tell my wife and children; “vote and show up for jury duty when summoned” and you get to bitch; because you have skin in the game. I am 80/20 bonds/stocks; I sleep very well at night.
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.
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!
Hi all–just had to add my two cents to the election commentary as non-American reader and observer: The idea that Obama is a “far left socialist” to ANYONE outside the US is absolutely absurd. I cannot emphasize how much of a joke this is. Obama is farther right, by a wide margin, than most right wing candidates in Canada, Europe, etc (with the exception of the neo-nazi right, of course). He is also farther right than many Republicans historically.
This is not to judge right or wrong. Those of us outside the US are excited about the possibility of the US having a president who is so intelligent, articulate, cosmopolitan, and world-travelled; someone who has the global perspective (potentially) that matters to the world. However, I respect that these are not necessarily the grounds that anyone inside the US is voting on, and that’s fine, of course.
Just wanted to add some perspective on the “socialist” commentary–which has many outside the US scratching our heads–I would have thought that providing support for those who are trapped at the bottom in a nation that so heavily preaches Christian values would have been a positive?
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!
+ Improve the quality of life.
Once again, who just defined passive income from commercial real estate(Apartment buildings+ store front retail)! Don’t screw around with the fiat (stock) market. Smoke, mirrors and leverage!
While the rest of the US is sweating bullets, those of us with real estate income are enjoying great sleep and consistent wealth preservation.
Once again Tim, I love your posts, but when are you going to blog about commercial real estate.
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,
I share your view on politics that you described here, and I appreciate it.
I find it bizarre when people take up a candidate as their cause – arguing on their behalf like defending a family member. Because no matter what: they’re still politicians, not family or friend.
(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).
Great tip from Mark Cuban.
In fact it’s common sense, it can be found in classics like “The richest man in Babylon”
Don’t invest in domains you are not familiar with.
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’m so happy you commented on Mark Cuban. He’s a genius. I saw him speak 2 months ago in New York City on the Upper West Side. Best business lecture I saw in over 10 years.
He said the same thing that you quoted, namely that he sticks his cash in T-bills (government bonds) and waits until he finds an opportunity that he knows about/understand.
He gave one great example that in his early days, he was selling some type of software. He knew it was a great product, so he bought a lot of the stock. Then, when customers stopped buying it, he knew it had tanked, so he sold it. That’s the value of investing in what you understand.
“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?
Here, Here, Rosie!
Listen everyone: Obama is not a Socialist! Do you even know what the term means? One of my parents is Danish and we lived in Denmark for a while. The U.S. and Obama’s policies are nothing like socialism.
It’s too bad that some of you have fallen into the right-wing brainwashing
which is just pandering to your fears.
Does being “financially successful” also mean that one turns off their humanity and is only concerned about their own wealth? Try to think long-term and not so short-sighted.
Great job, Tim. Keep it up!
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.
Actually, If you are only “Investing” in stocks then you are still a speculator.
The best and last investment book I ever read was “Fail Safe Investing” by Harry Browne. You can listen to his past radio archives (RIP Harry) here: http://www.harrybrowne.org/Archives/Archives-investment.htm
On that note, read anything by Murry Rothbard, F.A. Hyeck, Ludwig Von Mises, or any other Austrian Economist and learn what the establishment not want you to know.
BTW, Warren Buffet, and his whole persona is a scam.
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.
I’ve gotten into the great habit of saying whatever I want all the time, without worrying if it offends some people or not from a young age, and it’s helped me tremendously. Regardless of what you say I can’t believe you have the balls to say some of the stuff you do, and no matter what some of these angry nobodies have to say, it’s not going to affect you. Rock on! Massive Respect.
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.
Why do you require that you must beat the market in order for stock investment to be worth it? Matching the market should do just fine, and better than keeping your $ in a bank.
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%…
One of my favorite parts of your book is the questioning of what “happy” really means.
I also like that you have, here in this post, questioned the meaning of investing. My definition is “the act of placing one’s wealth to competently, confidently, and somewhat predictably protect and/or grow it”. Within that definition, most modern writings, speakings, and behavior relating to “investing” does not actually involve real investing at all.
I’m glad to hear that, despite the insinuations of other posts, you aren’t significantly exposed to the stock market and that your expectations of it are reasonable. It’s also great to see you pursuing understandability. That is absolutely paramount to me.
One thing worth looking into is monetary debasement. Sitting in money market funds or in cash is an investment itself… an investment into the U.S. dollar. That is an investment into the honesty, transparency, accountability, and responsible behavior of the Federal Reserve and its buddy, the U.S. government. A double take is possibly in order.
Great post, and I mean it.
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.
Judging by th comments I guess the Godwin’s law holds more truth then the Bradely effect.
I enjoy this post much more than the last, I think the direction you’ve taken will lead to interesting places.
Tim, if I understand what you’ve said correctly “Superior” meaning as in greater skill base for understanding the information.
Do you believe understanding everything is vital?
or is just understanding the right componets correctly?
How you determine if you truly know something inside out? Are there specfic question you can ask or parametre you can set?
Also while it would seem most people invest to retire. Therefore stop them doing something they dislike. (unless you want to keep working and talk about how you could stop anytime you want to.)
For you it would seem that the work (in the wealth creation aspect) is so minimal that it’s almost non-exstient.
SO the final question I ask is why would you go that extra 20% to achieve investing (wealth creation) sucess?
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:
For more information, here’s a thread on the Bogleheads forum where you could start:
(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.)
This is in response to your tweet asking for blog post topics:
– Thinking of life in terms of experiments
– Case studies of muses
– Things your parents did that helped you be who you are today
– Yerba mate
– A post asking readers to post the most important thing they’ve learned about muses
– A post asking readers to post the biggest change(s) they have made since reading the book
– Your philosophy about ‘sloth’ (you mentioned this in an interview somewhere)
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,
I vote for the mind and the energy, not the party.
Thanks for the book recommendations — and for urging people to vote.
Peter Schiff says, Obama is the new captain of the titanic.
The USD must half but probably loose 80% of its value: http://twurl.nl/s4gqj5
(an MP3 from the “Wall Street Unspun” radio show: http://www.europac.net/radioshow.asp )
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.
Themes for Blogs
1. Contacting Obama and interviewing him.
2. The Law of Attraction
3. Coolest UNKNOWN places to visit, ex: small cool underground bar in Hamburg Germany.
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.
Glad to see it didn’t take you long to eliminate stocks as an investment vehicle of choice.
However, there are MANY different kinds of investment options besides stocks. I would really like to see you turn your OCD powers of analysis and elimination on the following investment options, which I have found to be far better than stocks:
Real Estate (residential AND commercial)
Participating Whole Life Insurance
On Real Estate and Notes: consider their dual natures as an INCOME businesses and as GROWTH asset allocation. When considering investments, it’s important to distinguish between INCOME (cashflow) and GROWTH (long-term appreciation). Often INCOME and GROWTH are inversely related in an investment vehicle (e.g., buy a house with cash, and rent is all cashflow. Leverage it 90% LTV, and you have negative cashflow but now have 10 times the effective appreciation).
On Life Insurance: Be careful here. Many false imitators out there using this concept to sell you their non-genuine products. I believe Nelson Nash’s product is genuine. Focus on the “tax sheltering” and retirement aspects of this.
In the end, however, I think angel investing is the best way to go for someone at your level.
“Thanks in advance” for posting your results in Part 3 of your “Rethinking Investing” series!
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.
Ooops, didn’t read all the comments before posting mine above. I see others have recommended THE ZURICH AXIOMS. I will add that the main thing it has in common with THE FOUR OUR WORK WEEK is its refreshing counterintuitive aspects.
What about Ron Paul?
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?
I liked your post 🙂
I understand SEO firms make massive amount of money for a simple stuff but you get 10x + return on your investment.
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.
After hearing you mention Marc Cuban, I went over to his blog and really enjoy the quality of information that he provides. I was wondering if you had any other recommendations for blogs that you subscribe to that provide high quality information like his.
A new Michael Lewis article that updates “Liar’s Poker” with thoughts on the sub-prime mess.
I think ‘fixed income’ are nice as a hedge, but they should never be exclusively used, because this makes someone totally open to currency and inflation risk. I reiterate, there is absolutely no such thing as risk free. I agree that the key should be the peace of mind that comes as a result of knowing that you are safely diversified, and don’t rely on specific rare occurrences to ‘win’. But, since the market is a living breathing entity, I think the concept of outsourcing the management of a portion of your portfolio to an investment manager with a spectacular performance history would be along the same lines as outsourcing anything else. Instead of trying to become an expert at everything, why not let someone who is an expert, working full time to make the most of your money, manage it.
This comes with a huge asterisk. The asterisk being that the person or people designated to manage those funds would have to have a great performance history in times of good or bad.
Click on my name for the post I am referencing:
In July I posted about this same subject, with a different twist-
“Putting money in a fixed interest savings account or a certificate of deposit or a treasury bond would seem to be the lowest risk investments one could make. These have intrinsic risks though. If they don’t succeed the rate of inflation, you actually lose money by letting them sit in these accounts, and lose the opportunity that could have been made by the use of them. These accounts may be insured by the FDIC or by the government, but these aren’t infallible either…
…Mutual funds were the “risk averse” method as of the last decade, and with the market having gone to hell, this option as being non risk averse has become very clear also. I’m not just saying this because of the recent decline in the market. I have been saying this for the last few years, that the financial advisers who say that on a “30 year average” the Dow Jones Index always wins have become complacent to the fact that the data they speak of really only goes back 40 years and this isn’t much to go off of when speaking in “30 year averages”. I never trust these guys, because saving a million dollars 30 years from now might not even buy me groceries. (Obviously if the money was invested correctly, it would go up with the market, but either way it still doesn’t make sense in the way that they make it out to).
I’m not saying there isn’t money to be had in the market. But it isn’t just in buying something and holding it forever anymore. It is more about riding the waves and taking advantage of all of the options. Short selling and day trading will become much more advantageous now that the market has become so volatile, and headed downward. I’m not even sure trading houses will be so liberal with short sales as they have been.
The new definition of risk averse has more to do with action, rather than inaction. Inaction is putting money in a fund or set of stocks and letting it sit. Action is taking advantage of the above mentioned traditionally higher risk options, which become lower risk in a market such as we have now. Also, with the interest rates as low as they are and the market acting the way it is, it only makes sense that right now is not the time to invest in the traditional “low risk” avenues, but with venture capital investments which capitalize on the concept that it is more financially advantageous to spend in a market such as our current market than it is to save. Whether this be by buying a business, or by investing in the equity of a business.
Also, one should consider “diversification”, not in the traditional sense of the word, by just buying multiple stocks, but in the sense of the capital you are investing. Lets take $100 million of capital for example. If you invested this four ways, $25 million each into venture capital, equities, foreign currencies, and commodities (gold is the standard). With the venture capital and equities one might even want to consider having these split amongst different countries. Obviously in the case of a global collapse all of these tactics are still subject to lose, but then again, who wouldn’t? Either way there is no “risk free”.”
Gotta love Mark Cuban’s BRUTAL honesty in that quote. hahahaha