Rethinking Investing: Common-Sense Rules for Uncommon Times

118 Comments


I first saw this video at the May 2nd, 2008 Berkshire Hathaway shareholder meeting. Prophetic and not to be missed.

I’ve learned quite a few things in the last 18 months of exploring—and experimenting with—the world of investing. This post is my first attempt to share the findings.

The lessons have come from not just reading books, but trial and error, and picking the brains of some diverse and fascinating people:

-Warren Buffett, the richest man in the world, and CFOs/financiers at Berkshire’s portfolio companies
-Chief economists at top investments banks
-Dot-commers who have turned $40,000 into $2,000,000 in stocks using massive leverage
-Conservative entrepreneurs (still self-made millionaires) with all-bond portfolios
-Money managers of the ultra-rich and ridiculously famous
-Ivy league professors who not only trade options exclusively but also bet up to $500,000 per night as no-limit hold ‘em poker players.

In all cases, excluding blog reader feedback (how could I know?), the principles I will offer are from people who have made millions in their respective investments, not armchair quarterbacks (advisers) who take a management fee from the people willing to take real risks…

Total read time for this post: 6 minutes.

I’ve lost a little money, made more money (with “risk capital,” about 28% annualized over the last three years), and preserved almost all of my money. I’m terrified of certain things, but I build my irrational decision-making and temporary stupidity into the planning.

To start, here is a snapshot of my total current asset allocation in retirement accounts. I’ll come back to this. Notice the dates:

Let’s start off with some smart observations from readers of this blog, who commented on my post where I described Warren Buffett’s answer to my question, which recentlymade it into Berkshire’s new annual report! Here it is:

“If you were 30 years old and had no dependents but a full-time job that precluded full-time investing, how would you invest your first million dollars, assuming that you can cover 18 months of expenses with other savings? Thank you in advance for being as specific as possible with asset classes and allocation percentage.”

The observations I have picked out for discussion follow, and I’ve tested most of them. Some will sound complex, but this series will reduce it all to simple conclusions anyone can use:

From Lee:

For someone so risk seeking in your personal life, I’m surprised at your risk tolerance rate of 10%. From reading your blog, it seems like you live your life experiences with a 50% risk tolerance rate.

[Tim: This is a common misconception. I actually consider myself very conservative and risk-averse in both life and investment, and my close friends can confirm this. As we'll see, the phrase "risk tolerance" is hugely problematic, but behind the scenes, I micro-test the hell out of options to determine what has the best chance of a high return-on-investment (ROI), but this isn't transparent to most observers, who assume I regularly roll the dice and hope for the best. Not true.]

Patrick Clark [Tim: if you take nothing else from this post, re-read the bolded portion a few times and memorize it, especially the last sentence]:

I am going to make a few assumptions here:

1. You are an accredited investor.
2. Your businesses will continue to run themselves and create cash flow income for you.
3. This $1 million is true risk capital.

That being said, I am a investment advisor. I create portfolios for clients in both traditional asset classes (stocks, bonds, cash, and real estate) and non-traditional asset classes (raw materials, energy, metals, and currencies). This provides a mix of investments that are uncorrelated to one another.

Without getting into specific investment vehicles, an asset allocation will look something like this:

US Equities – 24.5%
International Equities – 19.5%
Real Estate – 3%
Raw Materials – 12%
Energy – 12.5%
Metals – 12%
Currencies – 6%
Cash – 10.5%

The goal is to produce an absolute return. For my clients, I am not interested in having the following conversation, “The market was down 40% this year, Mr. Jones, but we only lost 18%. We did a great job!” No. A loss is a loss. By setting up a portfolio for absolute return, not relative returns, your chances of forwarding the ball every year is much greater.

Remember, a 50% loss requires a 100% gain to get back to even. Don’t lose.

Luca:

cash IS an asset during bear market.

From D:

Find an investment style that fits your personality, then backtest that strategy [Tim: for those of you mathematically inclined, search for "Monte Carlo simulation"] over long & varied starting/ending periods to see if you can stomach the maximum drop (”drawdown”). And stick with it…forever. No one can predict the market, you never know if you’re about to buy before a big dip.

It’s true that growth stocks outperform a helluvalot of other asset classes over the long haul.

But, someone who put all their money in the S&P500 index on 1/3/2000 lost about -50% (by October 2002) and is still losing money eight years later! Most might throw in the towel at that low point, when they should have been adding. The pain of losing is alot stronger than the hope of winning.

Superstar investor via phone:

92% of your return is determined by asset allocation, 6% my manager/stock selection, and 2% by timing.

Russ Thornton:

Once your target allocation among the chosen funds had been determined, I would rebalance back to your target allocation when any single asset class deviated 20% from it’s target. There is meaningful data supporting this rebalancing trigger. You could also rebalance with additional savings which is a much more tax efficient approach and will reduce your capital gains realization. Rebalancing forces you to buy more of the relatively less expensive asset class in a classic “buy low” discipline [Tim: versus selling the higher-priced asset].

That’s about it. Buy when you have money and only sell when you need the money, but not before.

Lee:

I like Taleb’s idea of 90% in government bonds and 10% in highly speculative stocks.

More conventionally, I’d follow a highly diversified strategy as suggested by Swensen (Yale) in his books, adjusting the bond percentage up or down as dictated by risk tolerance:

stock funds:
large blend index (S&P 500)
small value index
International index
Real estate Index
Commodities (PIMCO real return)

bonds:
TIPs
Short term treasuries

Bex:

You can have a pretty diversified portfolio, even if you only own 10 stocks.

Henrik:

So basically, for the most stable returns, invest in a set of assets that do not go up or down at the same time. That means you need international as well as US exposure, and debt (bonds/money mkt) as well as stocks. [Tim: these are also called "negatively-correlating asset classes," common in pair trading, which Buffett did quite a lot in the 1970's and 80's]

Oliver:

Your allocation should be approximately as follows:

90% TIPS
10% Call options on the S&P500

This means you’ll lose almost nothing if the market tanks but you’ll still get a lot of the return of the S&P500 on the upside.

The first lesson is: you don’t know what you think you know.

Think you can predict your risk tolerance? I bet you can’t.

Let’s try another question that will drive the point home:

Would you call yourself a racist? I bet you wouldn’t, and I bet you are.

Take the Harvard Implicit Association Test (IAT) for race as many times as you like. I’m not a betting man, but I’ll bet you come up as racist, regardless of race.

Surprising? Perhaps.

I’ve come to realize that the questions most investment advisers (and investors) ask are the wrong questions, or incomplete. Even if you have only $100 to invest, this is important to explore.

Most advice and decisions center on one question: what is your risk tolerance?

I had one wealth manager ask me this, and I answered honestly: “I have no idea.” It threw him off. I then asked him for the average of his clients’ responses. The answer:

“Most answer that they would not panic, down up to 20% in one quarter.”

My follow-up question was: when do most panic and start selling low? His answer:

“When they’re down 5% in one quarter.”

Unless you’ve lost 20% in a quarter, it’s hard—neigh, impossible—to predict your response. It’s not to dissimilar from a common boxing maxim: everyone has a plan until they get punched in the face.

False assumptions about your future decision making almost guarantees failure, so either 1) dial back your supposed “risk tolerance”, or 2) simulate the loss with smaller amounts but higher risk investments before betting the farm. I use angel investments in tech start-ups for this purpose.

It need not be $100,000—go to the horse track and make conservative bets (high-probability, low pay-out) at $25 a race until you lose $200 (FYI: here’s how I learned to bet on horses). How do you feel? That’s the starting point: accurately gauging emotional responses to gain or loss.

Your decisions, and investment future, depend on calibrating accurately.

Continued in Part II, which includes best books, redefining “investment”, and more…

Suggestions for topics in this series? Please let me know in the comments. I still consider myself a novice and this is a work-in-progress. If investment advice, please give an example from your personal experience whenever possible. Real-life anecdotes are more interesting than opinions, though opinions can be helpful.

Suggested reading:

Picking Warren Buffett’s Brain: Notes from a Novice

The Karmic Capitalist: Should I Wait Until I’m Rich to Give Back?
Lifestyle Investing: “Compound Time” Like Compound Interest?

Posted on: October 21, 2008.

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118 comments on “Rethinking Investing: Common-Sense Rules for Uncommon Times

  1. Great post and I love your work. One small thing — I think there is a Harvard study that shows that 94% of all investment returns are determined by asset allocation (not 92% as mentioned above). This is a small difference and I’m not here to focus on that. Rather I want people to focus on how high this number is. It means ALMOST ALL of your returns will be derived by that single choice. So focus your time on make a good decision about that and far far far less time picking stocks or funds or money managers. Good luck to all and Tim, please keep up the great work!

    Like

  2. Tim,
    First of all, I cannot agree with you more on this post… I’m glad to see you’re not going down the road 99% of North Americans (yes I’m Canadian) are going down with: that is carrying medium and high risk funds in their portfolio on top of paying exorbitant managing fees.
    If you haven’t yet read it, Daniel R Solin’s book called “the smartest investment book you” ever read is the only book one needs to read about investing. Actually, I take that back, the only thing one needs to see is the diagram he put on page 12 which basically outlines that over the last 30 years, we’ve noticed that low risk funds give you virtually the same return as a high risk fund with out the risk of loosing money!
    Keep up the great work Tim and I’ll keep reading.

    Like

  3. My one critique of this post is the same that I have of nearly all investment advice: it says plenty about what to invest in, but nothing about the actual act of investing. For total beginners, it is far from obvious just how to go about making investments. One of the things I loved about 4HWW compared to other “business” books was how specific it was about taking action, going so far as to recommend specific useful companies/services and provide contact information. Advice like this is great, but it’s not impossible to find; meanwhile, searching for those specific actions to take usually just leaves one lost in a sea of advertisements for various brokers. I would love to see some investment advice that takes the 4HWW route: specific steps to begin investing in addition to suggestions on investment choices.

    Like

  4. My epiphany is that contrary to popular belief, Tim is highly risk-averse and micro-tests everything before trying it out. Throughout the 4HWW there were continual hints that this was the case; an adwords campaign to decide on the 4HWW’s title, praising Ed Byrd for releasing a pamphlet before releasing his product etc. It was easy to get swept along thinking that creating a successful business could be done by instinct and fearlessness. Success in anything takes, at the very least, time and hard work made obvious by superstar investor’s statement that ROI is 92% dependent on asset allocation. The investing formula seems pretty straightforward; diversify as much as possible and play the market cautiously. Aiming for a long term gain that comes eventually will leave you in a much stronger position than looking for a short term gain that could never come. Since we could argue all day about where and how to diversify; invest in something that you find relatively interesting, you will likely already be well informed about its performance.

    @Tom VanAntwerp I couldn’t agree more, I have read plenty about investing but nobody has made it especially clear about how to start playing the game or investing a few hundred. I’d love to know more if anyone could make any suggestions.

    @Morgan Coudray Thanks for suggesting Solin’s book, I’ll have to check it out.

    Like

  5. - More important than anything else: diversify, diversify, diversify (preferably in non- or low-correlated asset classes – warning: correlation during normal times is different from correlation during market crashes)
    – Only invest in stocks (and other risky stuff) if your investment-horizon is long enough to outwait the market if things go wrong (ie only invest money in it that you won’t need during in the first 5-10 years)
    – “Maximum tolerable loss x 2 = Maximum equity allocation” (at least according to Adrian Nenu from bogleheads.org)
    – Low cost no-load index funds are generally a good idea (they don’t underperform the market)
    – Rebalance when an asset class deviates 20% or more from its initial allocation
    – There are interesting non-mainstream strategies out there may or may not be good ideas: Harry Browne’s permanent portfolio (book: Fail-Safe Investing), misc momentum-based strategies (example: http://www.FundX.com), etc.
    (disclaimer: I’m inexperienced. I’m still 100% cash and trying to put a strategy for myself together. Thanks for this interesting post!)

    Like

  6. Tim,

    I remember you posting previously about the horse races and that during your experience you got it down to winning every race? (correct me if I’m wrong, my memory isn’t exactly the best)

    Anyways, I would be very interested in learning about your experiences with betting, I’d love to see the way that you approached it, no doubt there’s something to be learnt there.

    Cheers,

    Like

  7. I still think the best personal money management book ever written is a series of stories written from the 1920s to 1940s by George S. Clason, compiled into a single book, and published as “The Richest Man in Babylon”. You can pick it up at any bookstore for $7.

    Like

  8. I just have to say Tim you are one dam inspiring guy, I love the fact that you dont just blindly follow the advice of anyone but you get to the people that count and implement solid action plans. I would say that this would be absolutley crucial in the current market and if you have no idea in investing, get one!

    Rich

    Like

  9. Tim,

    This post is very interesting. I love the video –> “Shall I jump out of the window??” Ha.

    I am a novice as well, but have been interested in learning more about the details of asset allocation. I am currently working with an advisor, who I do trust and know very well, but moving forward, I want to be more involved with and knowledgeable regarding the reasons behind what % goes where and why.

    When you take a step back, it is comical to think how obvious some things are (i.e. buy, don’t sell, when the market dips), but it seems only a minority follow this practice. The balance between international vs US stocks also makes complete sense.

    Looking forward to part 2.

    Sheila

    Like

  10. Hi Tim,

    This is a topic that I am very passionate about … trading and investing.

    I’ve had my ups and downs, my bruises and my celebrations – and, through all this, I’ve survived (and thrived) as an independent stock trader.

    Similar to yourself, I, too, have had the pleasure of meeting Warren Buffet and, though most people would never hear of him, Ed Seykota (who, by the way, may not be the richest man in the world – but may be the most successful trader in history earning 250,000% in just over a decade).

    The first thing you must realize is that all trading and investment activities are a matter of probabilities. No forumula to date has been able to produce 100% accuracy rate – there are profits and there are losses.

    People often ask me: “What’s the difference between trading and gambling?”

    The answer is that people who are gambling with their trading either do not know their odds or are investing with the odds against them.

    People who are not gambling know their odds.

    I recommend approaching trading with a question: Do I want to trade like a casino or a gambler? Both have notable stories of making big money – but who makes the most?

    If you choose to trade like a casino – then you must know and understand your odds.

    There’s so much more to share but … only so much time.

    Be smart. Know your odds and, though you may not “win every hand” – if you’re trading with the odds in your favor, you can reasonably expect to be profitable over the long term.

    Good luck,
    Charlie

    Like

  11. Tim,
    Another great article. I think the Havard race test is a joke though. I took it once and tried to go as fast as possible. Here’s what I scored “Your data suggest a moderate automatic preference for African American compared to European American.” I’m white. So this would mean I favor African Amercians and am racist to European Americans like myself subconsciously. I believe this test is setup to show show a preference to white people. First of all its just putting you in a pattern of matching images and words to a certain side. Then it further stacks the deck by putting the good on the same side as the European American in the second round. Next it stacks the deck even further by putting Good and European together first, so you automatically associate them together when the swap them for the next round. I still scored opposite of what they were obviously setting me up for because I was going fast and they would put so many consecutive left or right keys in a row then throw the curve and I would hit the same key I had been hitting which just probably happened to pair a good word with African Americans or a bad word with European Americans.

    Back to the main topic. Yeah, I’ve taken a big hit this year. I’ll watch the video at home when I have more time. I do like the bold parts. I’ll have to think about it and talk with my planner some more once I read the rest of he series.

    Joe

    Like

  12. Tim, this is a great start to your series – especially in light of current events – but I’m definitely looking forward to you getting into the “philosophy” of your investment strategies a bit more.

    For example, a member of the New Rich isn’t all that well served by traditional retirement vehicles. I can only stick $4000 a year in a Roth IRA and any other retirement investments penalizes the hell out of me for early withdrawal of my capital. How do I deal with that as an investor who plans to take up to 20 mini retirements before I am 59 1/2? Are there ways to do this in an intelligent and tax advantaged way? How important is traditional “retirement” saving if you never plan to traditionally retire?

    Hope you can address some of these issues as you continue this series. Thanks for sharing your wisdom.

    Like

  13. Regardless of your investment strategy or tolerance for risk, the single biggest factor impacting your investment results will be your behavior.

    In other words, do you have the discipline to hold on when everyone else is selling or the good sense to protect your gains (through rebalancing) as the market hits new highs?

    Costs are certainly important — I agree. But even if you have the lowest cost portfolio available for your needs, the portfolio won’t do you any good if you don’t have the patience and discipline to let it work for you over time.

    And to be clear, I’m not suggesting that I or anyone else can predict or time the markets. I believe in low cost, highly diversified asset class (index) funds and believe you should literally buy entire markets both domestically and abroad and let the power of capitalism work for you over time. It’s not particularly exciting, but it works.

    But in the end, it’s all about behavior. And if good financial advisor can help you do the prudent thing even when every fiber in your body is screaming at you to follow the crowd, then I think an advisor’s fee is worth every penny.

    Like

  14. I’ve recently started to max out my 401K and am now putting about as much money as I can into a well diversified portfolio with a money manager, as I realize we’ll probably never see a better time to buy in our lives. However, I’d also like to do some investing on my own with a much more aggressive approach, but not an amount that will really affect me if I lose it, so ‘play money’ if you will.

    Well, I’ve narrowed it down to they TYPES of companies I want to invest in, but I don’t know where to go to research SPECIFIC companies. I’ve basically decided that I want to find some pretty speculative stocks in the Energy Technology market as well as the Biomedical markets(stem cell treatments and biologically based medicines).

    So my question is where can I go to research companies in these sectors? Are there industry magazines or websites that highlights up and coming companies? This might be a stupid question, but I’m literally just starting to invest and have no clue where to look.

    Like

  15. Tim,

    Your allocation seems to be 180 degrees from what Warren Buffett is doing. In a recent article – http://money.cnn.com/2008/10/17/news/economy/buffett_op_ed/index.htm?postversion=2008101709 – Buffett states he has moved virtually his entire personal portfolio from treasuries to U.S. stocks.

    He offers this great quote: “A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread, gripping even seasoned investors.”

    Like

  16. Great article Tim, helps to show all different views of the market that aren’t as publicized. Also i took that race test and scored a no preference my first time…

    Like

  17. Asset allocation is overrated. It’s impossible to measure despite fancy concepts like beta and MPT. Beta has no predictive power of returns. Read Burton Malkiel.

    No strategies are guaranteed, but Value Investing seems the best approach to me. Avoid debt, pursue high ROE and lots of cash flow.

    Read Graham’s Intelligent Investor if you haven’t already.

    Check out the gurufocus forum and the Barel Karsan blog.

    I enjoyed your book very much. I feel it doesn’t address becoming the NR while caring for very young children as much as I had hoped but I’m sure you would say it’s still possible.

    Like

  18. Note that intrinsic value drives the capital allocation decision at least as much as risk tolerance.

    For over a century, the S&P 500 (and its antecedents) have reverted to a mean of about 16.5 times earnings. It appears possible to somewhat predict your 20-year investment return from the current index P/E ratio. See my ancient post on the subject:

    http://www.spinoffprofiles.com/proof

    Like

  19. Buenos Dias! Hi everyone (I enjoy reading the blog comments)

    Hi Tim, very interesting blog, the video was comical…

    I broker loans and my work is derived from financing real estate/sell of real estate. Plus, I’ve taken a keen interest in mortgage-backed securities and am working on developing a REIT (Real Estate Investment Trust [huge leverage for investors], so the video was right on. This does not imply that I agree with the way things were handled in the Secondary Market.

    Anyway, I understood the first lesson: 1. Assess/formulate a realistic risk tolerance 2. Form losses with small amount with high risk (similar to a REIT) 3. Entertain the advice you received and follow through 4. Determine Investment Vehicles…Gotcha Thanks!

    Since you’re the point of contact to a lot sources and you ask the right questions, I appreciate your hard work and your article. Keep it up, and I would suggest a better outline to format your research on your next Investment Article.

    Good luck this Saturday on your speaking engagement. As for everyone else, thanks for your comments, I appreciate those too (Gracias) because I learn so much.

    Hasta luego!

    Dynasty

    p.s.- (off subject) for the longest I wanted to suggest EarthClassMail.com, it’s the coolest postal mail service online (online P.O. Box, etc.)

    Like

  20. For most people it’s easy to understand a basic concept of investing. But to get an education of fundamentals where is the best source to turn to? text books?

    Like

  21. Tim, may I suggest getting in touch with William Bernstein in regards to asset allocation. He has penned both “The Intelligent Asset Allocator” and “The Four Pillars of Investing” and is somewhat of an MVP to geeks following the asset allocation and personal finance worlds. He was a practicing neurosurgeon who started a financial consulting firm on the side, an interesting guy to be sure…and supremely supremely objective when it comes to financial issues.

    Like

  22. Tim,
    No I wouldn’t…and I’m not…wanna bet?

    How much were we betting?….My first time through the IAT

    Your data suggest little to no automatic preference between African American and European American..

    One must be careful about making blanket assumptions (or bets) on such things as race regardless of the statistics behind them. One must be especially careful when using a concept as volatile as racism to drive home a point about investment risk tolerance.

    This all being said, I am a huge fan!

    Like

  23. Hi Tim,

    Great topic. Some areas I would like to see covered:

    1. generating cash flow from investments so that you can live passively off them, it seems real estate for this is best but I’m not an expert
    2. how to choose someone (or multiple people) to manage your money, or doing it yourself
    3. diversification – everyone seems to assume it is the best approach (which I see the logic of) but by diversifying you are basically admitting you have no idea what will go up or down.

    Thanks!
    Brian

    Like

  24. I have a friend who tracked his investments for several years and checked to see which “source” of advise yielded the best returns.

    For instance, out of the financial newsletters published by Agora, the fancy expensive ones did not do as well as the “staid” Outstanding Investments, which actually did best.

    As for me, I lost tons of money in startup/investments of various kinds years ago. School of hard knocks. Now that even banks seem shaky it can be difficult to know where to place our funds. One huge bet we all need to think about is where we think the dollar is going. Assets can grow in dollars and shrink in real value.

    To get an idea of how any investment class or stock is faring in real value, it may interest you to check out http://www.PricedInGold.com. It’s an idea that’s a little before it’s time.

    As for me, I’m interested in keeping the majority of my “safe” money tied to currencies that are tied to metals. I’m not betting for the USD at this point, particularly if it appears that Obama’s policies will become actualized. History shows that those policies will hurt the dollar.

    As for my “risk” money, I’m interested in investing in life settlements through a company that specializes in this. It is a zero coupon bond with funds held in eschrow by Wells Fargo, payment guaranteed at the end of term (which is usually around 36 months), whether the policy holder dies or not. (They can make this guarantee because they add 15 months onto the actuarial table estimate of death to determine term, and then buy reinsurance to pay out at end of term if the policy holder really beats the odds.)

    Returns are11-15%, depending on the program (several offered each year), with huge upside potential. If the policy holder does die early (or “on time” actuarially, but before the end of the program), you get the entire payout you would have gotten at the end of the term. So return can be 30% or more, depending on time of death.

    I also know a wealth manager who has a life settlement fund offering which has been returning 15% a year for years.

    The other thing I will do with my “risk” money, is invest in websites. I’m able to manage them sufficiently, and I know how to buy them for less than 1x annual profits.

    Like

  25. Tim,

    I have been studying this topic for some time now. I think the investment game works with your over all game plan. Make as much money with the least amount of time.

    When the stock trading patterns are ready, you trade. When they don’t set up for you, start working on other projects. In todays market cash is king for now. The best read is going to be bill o’neils how to make money in stocks. You will love it. And if you want a history lesson read jesse livermores book “how to trade stocks. Good luck

    Todd

    Like

  26. Tim,
    Nice discussion of risk. Asset allocation is extremely important, but don’t forget about costs. That’s what Buffet was concerned about when he suggested that you invest in low cost index funds.

    Paying your broker 1% and mutual fund manager 1.5-2% (no-load doesn’t mean free) may seem reasonable, but as the years pass those fees add up. They are in effect reverse compounding because you would have kept the money you paid in fees invested – working for you.

    Be especially wary of any broker promising market-beating returns.

    Check out this short article for an example of how your broker does better then you: http://www.efficientfrontier.com/ef/996/broker.htm

    Also, John Bogle’s books are a must read to learn the benefits of index funds and the risks of paying your broker too much.

    Like

  27. Tim –

    Great post. I would love to get your take on the question I have most often struggled with relating to investments: “How do I know when to switch allocations?”

    I’ve got my retirement money in index funds right now, but I would like to switch to more conservative investments as I approach retirement.

    Rephrasing the question: “Is there a generally accepted method for timing the conversion of a higher risk investment into a lower risk investment as one approaches their investing horizon?”

    Like

  28. what kind of t.v. deal are you negotiating? what would be your ideal t.v. show? upon discovering you, i thought about exactly that.

    Like

  29. Tim–

    I think of you as someone who thinks outside the box, but in this article you’re firmly constrained within the box. For the most part, you’ve gotten bad advice and the wrong lessons. You’ve talked to people who have made their money in the postwar boom. That is, WWII to about 2000. Their responses reflect that market, but that is not the market we are in now.

    We are now in a depression. We are now seeing the very real risk of hyperinflation. We are definitely experiencing very large inflation– about %20 a year (this was the rate before the recent “crisis”).

    Thus putting your money in the US Dollar *is* an investment. Its not keeping money on the sidelines, its putting your wealth into an asset– a form of debt– that is currently being devalued.

    My personal investment strategy is %30 Warren Buffett, %60 Ludwig von Mises et. al, and %10 myself. I used to think of investing much the way you are here– but that was the 1990s. That was boom times.

    Ludwig von Mises is not an investor, he was an economist. You can learn anything you want to about the school of economics he founded at http://www.mises.org

    This school accurately predicted the housing crisis, the CDS crisis, the failure of everything we’re seeing fail right now.

    Investing without a solid foundation of economics is just as bad as investing in an asset class you don’t understand the fundamentals of– because the dollar is an asset class and buying any stock denominated in dollars involves dollar risk.

    Most of the time dollar risk is negligible, but that is not the case now.

    For a good introduction to money, I recommend Murray Rothbards book at http://www.mises.org/money.asp Its a short book, a quick read, and its free.

    You’re a worldly guy, get your assets out of the dollar– some other currencies aren’t being debased, but buy precious metals as an inflation hedge.

    Ignore anyone who tells you to “allocate” your assets. What did Buffett do? Did he buy companies based on which “category” they were and then shift that around every few years based on what was in fashion? Of course not. He bought good individual companies.

    Maybe its because my strategy is a split of Buffett and Mises that I’m recommending them to you, but I think you– and your readers– are going to be painfully surprised in the next 5 years if they don’t recognize the nature of the dollar— and I think you would be well served by better understanding Buffett, and listening to people who make their money managing *other* people’s money less.

    I was making %80 a year until 2006, when I decided the housing bubble was going to pop and then start the dollar bubble, and that I needed to get money out of the US dollar and denominated assets. At that time I was investing in canadian royalty trusts– returning around %10-%15 a year in dividends, which covered my principle, and then taking aggressive positions in using options spreads– where the odds were in my favor and the pricing was right. If all the options investments had been a total loss, I would have only been down about %10-%15. As it turned out, about %50 of the options investments paid off- returning %300-%500 each, and then the ones that were losses returned %0-%50. That was very profitable, and I was betting on clear and obvious trends, hedging by using a spread, and my downside was covered with the more conservative investments.

    But all of my money was in the sector that was performing at the time- commodities. No point in buying REITS in a real estate boom because the real estate bubble was obviously going to bust.

    People act as if you can’t predict the future. And you can’t precisely, but you can see risks in an economy and the direction the market is going. People who were buying real estate in 2003-2006 were gambling because they knew what was happening *then* but no clue about the future.

    Investment wisdom can be gotten from Buffett, and he uses a different method than me, but his perspective is sound.

    But economic wisdom is the thing that would really set you apart from the mainstream as an investor. Virtually nobody really has it, and even Warren Buffett hasn’t quite got it. (notice his silver purchase– it was the right move but rather than holding it like he should have he sold out around $5/ounce. He lacked the economic perspective to know that silver was (and still is) a long term investment.

    Its hard to get a whole worldview into a comment box– but I think that you will find that good economics is not dry, it is very rewarding, and it is very profitable.

    Check out the Mises Institute website at mises dot org, and read whatever catches your fancy– want to know the reasons behind the great depression? Read “Americas Great Depression” — they have many books for free on the website, and the others are well worth the money.

    So, why did I say we are in a depression right now at the outset of this comment? Because economic growth is under %5 a year…. yet inflation is %20. (Even using government figures its over %12). This means that the seemingly positive return in the GDP is more than offset by the devaluation of the US dollar— which the GDP is denominated in.

    Thus the economy is contracting, and actually has been for several years. (High tech is still expanding, but the manfuacturing base of the country is still collapsing, and more than making up for it.)

    Would your investment thesis change if you recognized we were in a depression rather than a short recession?

    Like

  30. Options are interesting. I don’t diversify. I keep a lot of powder dry and try to pick winners or losers and play it that way. This takes a lot of time and study so I wouldn’t recommend doing it if you just want to buy, hold, and “invest.”

    In 16 months of doing this I’ve made about 120% annualized on the money I play with. Thats through all the big gain days and big losing days. I keep a lot of it out of the market on a week by week basis, then jump in when I think it is about to move. After it moves, I sell, regardless if it moved my way or not. I’ve taken some losses but my winners hit big. With options, if you can call it right more than 50% of the time, you are golden.

    Like

  31. Hi Everyone.

    Judging from these comments here, there is probably only one person who really knows how to make money trading and that’s the guy in the comment section named “The Trader.” Tim, in your blog, your guru Patrick Clark’s portfolio has been decimated in this market because all of his “diversified” investments like energy & materials have been falling dramatically, equally as much or more so than the stock market. Diversification is useless if you’re diversified into all the wrong areas.

    A skilled trader does not fight the markets…a skilled trader can make money in all types of markets..up, down or sideways markets…in equities, currencies, futures, etc. Ultimately, all these markets behave the same because human emotion drives all of them.

    Investing IS only about probabilities when it’s done right. When it comes to investing, you want to be “the house”. You want odds in your favor. How do you do this? First off, you must cleanse yourself of old Wall St. “conventional wisdoms” like “Buy & Hold”, “asset allocation” and such. These are institutional biases that are intended to keep you sitting at the craps table, as a gambler. You also need to disconnect from the mass media, CNBC, etc, whose financial interest is to keep you watching, not to build profits in your portfolio.

    Secondly, you need to approach the market like a scientist with an open mind, as it seems that you are currently doing.

    Don’t bother reading books like “the intelligent investor” unless you need something to put you to sleep. I manage a 9-figure portfolio and I still can’t get through that one without dozing off.

    DO read “The Successful Investor” by William J. O’Neil…this book will change your entire investment philosophy as well as your results. Widely regarded as one of the most legendary investors, O’Neil also publishes Investors Business Daily. Decades ago he created the first ever computerized database of the stock market, and did an empirical study of the traits that the most successful stocks had. He also was able to devise a method for determining market direction, so that you know when it’s safe to invest in stocks. The past few months have NOT been safe, and everyone following this strategy has either been completely out of the market, or shorting stocks to profit when they drop. I view this book as the Bible of stock investing, since it’s highly pragmatic and delivers a rules-based approach. Having a rules-based approach is absolutely critical since opinion and emotion will always cause you to do the wrong thing.

    Further, you can read about other legendary traders in the book “Market Wizards” by Jack Schwager. This book was transformational for me. It made me realize there were people out there making serious money in trading, and that I could do it too.

    Finally, “Reminiscence of a Stock Operator” by Edwin Lefevre chronicles the life of Jesse Liverpool, one of the most legendary traders of all time. This is a novel, with nuggets of wisdom woven in.

    Cheers,

    Ben

    Like

  32. Hey Tim,

    I think this is consistent with the NR philosophy of Cash Flow First and big pay day second. I’ll make sure that I pass this strategy over to the New Jet Set. Look forward to the next post in the series

    Best,
    Rob

    Like

  33. Joe M: Actually, the IAT is set up randomly so that sometimes black is associated with good and white with bad before vice-versa, and the supposed priming doesn’t make any difference (or at least statistically accounted for).

    That’s why you’re invited to take the test more than once.

    However, I’d be surprised if there were actually a bet on it–12% of the pop. come out as non-racist. And now that I’ve got my similar results, I feel like there should have been money on it. =P (also came out as a reverse sexist)

    Oh… and there was an article too? Ooops. I’ll leave commenting on that to people with financial experience.

    Like

  34. The first book any investor should read is Swensen’s “Unconventional Success”. Swensen is all about allocation rather than stock-picking, and the book debunks the hyped alternatives to his core portfolio – methodically dissecting the returns and the fees, showing that the extra returns to those alternatives (if any) never make up for the additional risk you incur:
    http://www.islandersoftware.com/weblog/2008/08/01/unconventional-success-swensen/

    Also there is a site dedicated to value investors you might be interested in:
    http://libertyvalley.com/

    Like

  35. Tim,

    I suggest that you drop whatever you are doing and read Worry Free Investing by Zvi Bodie, Graduate Finance Professor at Boston Univ. see http://www.amazon.com/Worry-free-Investing-Bodie-Michael-Clowes/dp
    /0130499277/ref=sr_1_1?ie=UTF8&s=books&qid=1224722182&sr=8-1.

    Bodie will change the saving/investing world with these concepts about stocks and risk (yes equities ARE risky even in the long run.) Using your approach on contacting important people I have recently been in touch with Dr. Bodie and will be part of a beta test of an on line Q & A.

    Get acquainted with “consumption smoothing” Laurence Kotikoff (another BU prof) and Scott Burns – see their book Spend Till The End.

    Consider subscribing to Grants Interest Rate Observer – the fastest way to get MBA level credit markets information without grad school. Consider attending a bi-annual Grant’s conference in NY.

    I was once a typical asset allocator just like everybody else. But stocks get more risky, not less so in the long run. While the probability of a shortfall diminishes over time the size of the shortfall increases (a 40% loss on a 1M stock portfolio is real money). If we have such a large meltdown the year before I plan to retire then retirement is not an option.

    I lost 1/3 of my portfolio during the tech wreck of 2000. I said, “never again” and studied Bodie’s work. Thanks to his concepts the current wreck has not hurt me at all. With no risk I am up approximately 3% this year. Lao Tzu said, “if you have enough, the whole world belongs to you”. Read Bodie then let’s get him to help the 4HWW community. He can dial us in with his grad students. Maybe we will sit with him some day as he testifies before the Senate Finance Committee.

    You have hit a home run with 4HWW. Your ideas have certainly changed the way I do business. And, it helped change the way I invest. Do not lose what you have earned with your incredibly creative work. Study Bodie.

    Good luck,

    Greg

    Like

  36. Pingback: | Investing Won
  37. Jay,

    All in all there is not one strategy that beats them all. As history does repeat itself we lend your ideas and strategies based on the past. There is not one person who can predict the future and investing is more simple than what so many people try to make it out to be. Reselling is the same as an investment, let’s not complicate what needs to stay simple.

    Jose

    Like

  38. Tim – I am excited to read this series of posts by you. I previously was a corporate guy working in the consulting & IT sector and gave that up to trade commodities, stocks & options full-time. I’m now 27 & supporting myself in my own way by trading. Its an odd combination to have my own version of the 4 hr. work week & be in the finance industry.

    I hate to say it, but I think you really limited yourself and what you’re capable of in this post. By the words used in it, it looks like you interviewed a lot of long-only mutual fund managers that do well in a bull market but get smoked when the market changes. ‘Diversification’ is all well & fine but I think you can do a lot better given your ability to understand more complex ideas that you have demonstrated in other posts. Watch how the correlation in uncorrelated items goes to 1 when things get ugly out there (which happened the past month or so). A sinking tide sinks all ships, whether they are red, blue or green. The majority of a stock or mutual fund’s returns are related to the overall index anyways.

    I think you can do MUCH better using some more advanced techniques than long only stocks & sitting out the times that are too volatile.

    Long-only funds rely on ‘hope’ that something increases in value. Warren Buffet is amazing but 99% of the people that try & imitate him cannot as they don’t have the discipline to follow his method. Also, a company is a GREAT value on paper right before it goes bankrupt & is de-listed.

    I do a lot of long-short active strategies that do not require me to be in the market all the time, but rather I am only in the market when I have an edge. The edge is roughly defined as: (% Wins x Avg. Win Size(as a ratio of win/loss)) – (% Losses x Avg. Loss Size). If this number is positive over a valid set of trades (50 or so), you will make money assuming you risk at most 1-2% of your capital on a trade. Last year my win % was about 35% and I had about an 85% return on my account. I control my ‘risk’ based on how much I buy or sell (how large of a position I take). The role of the investor or speculator is to exploit this edge as much as possible.

    I think that it would give you a better perspective if you tried to chat with anyone mentioned in Jack Schwager’s ‘Market Wizards’ or ‘New Market Wizards’. Also, any of the old pit traders that did NOT manage money or collect fees from anyone else will have good advice. Besides, they have great stories about fist fights and other stuff in the pits too.

    I look forward to the other posts in this series.

    Regards,
    Eric

    Like

  39. ??????

    ??????????????????

    ????????????????????????
    ???????????????

    There are only three ways to make money in stock market:

    1: Trading

    2: Value investing

    3: Index investing

    Nothing more.

    1:Trading is like someone who tries to time the market (buy low, sell high),
    it’s same as gambling. You may make money in short period of time
    if you are lucky, but in the long run, you’ll most likely lose.

    It’s just that we still cannot see the future.

    Pros: It’s exciting, for some people. Just like gambling.
    If you like taking risk and have a lot of time staring at the monitor,
    and you enjoy it, then you may try trading.

    Cons: 98% of time you will lose money. I hear many people
    bragging how much they made in trading, but they are not
    talking about their 20-30 years long experience. Don’t think that
    just because someone has jumped off from 8th floor and survived ONCE,
    and it was fun, it means you should try jumping off and survive and feel
    excitement out of it.

    Advice: Do it for fun. Do it with other peoples’ money not your own.
    (Trading with other peoples’ money, you will always win. (with commissions)

    2: Value investing is like Warren Buffett style investing.
    You pick the market you’re VERY VERY knowledgable in.
    And FIND the company you BELIEVE that it will grow steadily for
    more than 20 – 30 years.

    Pros: You will make the most money in this style in the long run.
    Just look at Warren Buffett’s net worth.

    Cons: It’s very hard to Analyze the company. There are many ways to
    check if the company has the most potential, but it requires tremendous
    amount of research, and intelligence. W.Buffett started reading
    company’s annual report since he was 11 or something, he just enjoys
    doing it. He said once that he read annual reports of almost all of the
    companies when he was 20 something years old.

    If you don’t have passion/intelligence like Warren Buffett,
    then you will most likely pick the wrong company.

    3: is simply investing in index fund. (like S&P 500/1500 index fund).

    Pros: Easy. You don’t have to think. There will be an up and down, but in the long run you’ll most likely get 10-11% annual return, as long as there are more people in this planet who think positively about future than negatively, you will be profited in the long run.

    If index fund investing doesn’t work, it means that having money in cash
    doesn’t mean any better either.

    Cons: It’s boring. Nothing to analyze, boring return.

    My opinion from my experience:

    – If you like having fun with taking risk with your money, then
    use your 100% money to trade, it should be very fun.

    – If you want to be the wealthiest man just like Warren Buffett,
    then be just as intelligent, passionate like him, and pick few
    companies that you are SOOO sure will grow, and invest 100% of
    your money, and also ask other people to believe in your ability to
    invest, and invest other people’s money as well.

    – If you just don’t wanna think about it, and want to keep on doing
    what you are doing right now, BUT you don’t wanna leave your
    cash uninvested and lose value every year of inflation, then
    invest it in low or no load index fund. And forget about whole thing.

    As for bond/equity balance:

    If you are VERY worried person, then go for 100% bond.

    If you are NOT easily worried person, then go for 100% equity.

    If you are little bit worried person, then go for 50/50.

    If you don’t really care about whole thing, then keep it 100% in cash.

    Keep it simple, don’t think too much.

    You will die anyway one day. Who cares.

    You are intelligent enough, so even you are so broke in 60s, then
    you will find the way to make money and enjoy.

    My advice to younger people:

    Don’t think about investing in stock unless you have at lease 1M bucks
    to invest. Till that mark, just invest in knowledge, skill building.

    ???????????

    ???????????????

    Like

  40. Tim and all-

    Prior to reading the 4hww, I was obsessed with learning about investing. I really enjoy the process, but I’ve found that I enjoy the returns more. I spend less and less time on investments and more time on lifestyle design. why? Well the book was REALLY convincing ( :) ), I’m not Warren Buffet, and (not to be rude) neither are you. I’ve been the genius and the idiot in investments. I’ve made and lost large amounts of money. I’ve read a library of books and taken action based on my studies. In short, i’ve done it. I love it some, but I’m not wired like a Warren Buffet. I can boil it all down to two things:

    1. Price is what you pay…Value is what you get.
    2. The rest is noise.
    99% of all so called investors cannot internalize and live these simple concepts. Most people, frankly, just aren’t wired to be good investors. If you are not single minded (like my investing hero, Mr. Buffet), then you’re better off finding someone who is and investing through them. As evidenced by 4hww, there are ALOT better things to do with your time than trying to chase yield and/or outperform markets. In fact, once you’re convinced about their quality and have demonstrated to yourself that you completely agree with their investing premise, put your money in and then get out of the way. Stay out of the way until they retire or change their premise.

    Yes, markets change. The value of the dollar changes. Empires rise and fall. Noone can predict what exactly will happen in markets, but everyone is sure at one time or another that they did based on some “soft” science. Investment, however, never changes as long as markets exist…There will always be wisdom in buying a dollar for fifty cents or less. The trick is recognizing the deal, being correct in the analysis, adjusting for risk, and following through on your convictions. There are simply people that were born for this work. They’re on their “mini-vacation” at all times because they LOVE it. Are you that person? Do you love “it” or the return on investment?

    If you truly love it and have the talent, raise money by attracting passive investors and go for it! If not, spend WAY less time on the subject matter and “outsource” with the best in the most cost effective manner. (For example: use your 4hww business to open a roth 401k for you through someone like Scottrade buy into a well-run fund and sleep well at night.)

    Who are some of these people? I personally really admire the work of Bruce Berkowitz, but there are a few others that are also outstanding.

    A few other tidbits:

    Diversification should be called “deworsification” as its simply an adjustment to your portfolio for ignorance. Diversification as its typically practiced truly only means that you’ll underperform the market as your investments will utlimately reflect the markets less fees.

    If you think you can’t lose money in treasuries, then you need to study more.

    Learn to “sit on your ass” for better returns in the long run. Let’s say you bought 100 shares of Berkshire Hathaway when it was a newer security because you understood that Warren Buffet was a genius in finance and that he was turning it into a holding company for great businesses and then did no more than read his annual reports to ensure that he didn’t lose his mind…How rich would you be now? and how much smarter?

    There is nothing in this world so magical as “compound interest”. (read Poor Charlie’s Almanack for alot more on these last two.)

    .Finally, average returns mean nothing…COMPOUND RETURNS reflect the money you have at the end of the day to spend. Don’t listen to your mutual fund sales person when they tell you how great it is that this or that fund “averaged” anything. Make them SHOW ME THE MONEY!

    Happy returns!

    PPC4

    Like

  41. Tim,

    I graduated with a finance degree and for some time, was really into the stock market. I had a mutual fund (which had negative returns every year until I closed it). After that, I opened up my own stock account, bought a few shares in a tech company and lost some more money.

    Then I realized something. I simply had no interest in the stock market as an investment vehicle. And once I thought about this more and more, I realized that playing the stock market is not for me. I’m not saying that money can’t be made in stocks, only that if you want to be good at it, you have to invest A LOT of time in it. Like everything else in life, we have to committ ourselves to something to be good at it.

    Secondly, I no longer believe in the concepts of ‘asset allocation’ and ‘diversification’. Like you quoted Warren Buffet in a previous post, diversification is for people who don’t really know what they’re doing. This makes perfect sense (though it contradictory his earlier advice to you to invest in an index fund).

    If I know a company / industry inside out, I’ll know more or less when to put money in and take money out. Like Mark Cuban states in one of his posts, it all comes down to an information advantage (Mark is actually against investing in stocks; quote: “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.”). It all comes down to this: how much do I really know about my asset? If all I have at my disposal is public information, I don’t have an information advantage because all public information is already factored into the stock price.

    As for me, I’ve decided in the end to use my money to invest in a combination of real estate and conservative vehicles (bonds/t-bills/savings account). I mentioned real estate because I have a background in appraisal and it interests me a great deal. I intend to invest my time into finding a property, repairing it, etc. and educating myself on these topics continuously.

    If I lose any money, I can live with that since the decision was mine to take and not someone else’s.

    Like

  42. As someone who has traded options full time I can tell you that high returns sound great until you consider the other than financial investment.

    Your attention can be consumed by the markets and your life dominated by the rush of fast profits and the pain of lingering losses.

    Like some people commented above – get out of the conventional investing box. Why do we really want? Reliable, passive and stress-free cash flow. If you make that the end in mind you´ll find it takes a lot less capital than you might think as a specialist in one type of investing. Plus, equally as important your mind and time will be free to live life!

    Finally, I also agree that the next 10 years in the investing world will be very different to the last 20 years. Remember what the 1970´s was like. Hmmm!

    Like

  43. I am not a professional investor. I started trading stocks only a few months ago. I did however attend the Berkshire Hathaway meeting last May and remember Charlie Munger commenting on diversifying your portfolio.

    He said something like, “Diversifying your portfolio is something we’ve all been taught to think is the right thing to do when in fact most people have no clue what they’re diversified into. How can you put your money into something you don’t fully understand? It may seem more logical to invest on just a few stocks or even a single stock that you really understand know inside and out and hold on to it.”

    In other words, like the old adage, “don’t keep all your eggs in one basket” could actually be bad advice, at least according to Munger.

    Well I took his advice and recently sold off my entire IRA portfolio and purchased BRK:B. Do I know all of Berkshire’s portfolio inside and out? Not really. But I do know one thing; who better to manage my money than the greatest investor in modern times? Now its the only stock I look at every morning (kinda refreshing actually). So far, I’ve done ok but I get better sleep at night.

    Like

  44. For a book that throws every “common” investing technique under the bus, I recommend a book that just came out recently called “Killing Sacred Cows.” Written by up-and-coming financial guru Garret Gunderson, who was a multi-millionaire at 26 (so he actually practices what he preaches). 401(k), not a good idea according to Garrett. Instead, find your unique ability and what you’re passionate about and go from there. . .I love it.

    Like

  45. I would always say educate yourself. It is your money and even if you have someone helping you, you are the ultimate decision-maker. Unfortunately, the weakness in this advice is that there is so much junk out there written about investment, whether it be equities, real estate, or small business.
    If I could make a single suggestion, I would recommend this website:
    http://www.minyanville.com/

    I would also remind you that when most people are offering advice or knowledge, they might be trying to sell you something and it is best to be skeptical.

    @Tim:
    I have actually wondered how you allocated your money, thanks for sharing. I was completely unsurprised to see what it was now, nor by the projected allocation. How about something on fixed income assets/bonds. That’s something I wish I knew more about. How did you choose yours?

    Like

  46. Tim,

    I just got told of an online startup by an academic who had been researching asset management – BTW her conclusion was ‘If they were that good they would spend their time managing their own money, not other people’s’, and that ‘they are not actually worth their fee’.

    The website is http://www.covestor.com, where you can look at the historic profiles of other registered investors, and if you desire, you dictate that a certain amount of your portfolio will copy theirs. And I believe this other individual benefits by receiving a proportion of the gain you receive under their guidance.

    I believe this site goes lives this winter.

    Maybe if you have been soaking up some heavyweight knowledge you can put it into practice there, and we can all follow your lead?

    And for this tip I’d only ask for 10% of your annual gains… ;-)

    Simon Scott

    Like

  47. Hey Tim,
    i agree with you when you say that you are risk averse. I can see this from the way you test your muse/s. I guess that’s the way how investments should be looked at.. small risks vs. big rewards. Keep it up man!

    Like

  48. Tim and all-

    Elam makes a very important point. You must understand what you are investing in. Investing advice is generally the worst advice given as 99% of it is counterproductive. Most of your investment “advisors” are nothing but salesmen. (An interesting question to ask of any individual who is selling you some investment is to ask them where their money is…Why their money is where it is, and do they share the same losses as you?)This is why I say read some of the great works on the subject, formulate an idea of what you truly believe, and get the money to the investor who practices this. Do the research, don’t let a “financial advisor” convince you of anything… If you believe in value, get the research done to find out who the best is that has a fund you can get into. If you’re into market timing, quants, etc. then do that.

    A disclaimer: I’m firmly in the “value” camp, and I don’t believe that most investors will outperform market returns through quant trading, chart reading, small/mid/large cap/bond blend, or any similar iteration. The value of any investment is the money that one can gain from that investment over its life discounted at a reasonable rate. If you buy something at a price below its intrinsic value, its very likely to outperform other investment choices over time. To me its that simple…I’ll never understand why people don’t get it, but hey party on with your bad self.

    PPC4…admitted value junkie.

    Like

  49. You’re absolutely right about not knowing your risk tolerance. I’ve always answered that I was highly risk-tolerant, because a) I “know” that stocks go up and down but mostly up over long long periods of time, and b) I was talking about retirement savings, which I won’t “need” for several decades. But I had a real life scenario that brought it home for me recently. I work on Wall Street – still. I watched a certain Wall Street’s stock fall precipitously, from a 52 week high in the $60s, to around $7. I knew (as did anyone who read a major newspaper) that a deal was set to go through the following week that should keep the firm safe. So my husband and I discussed buying $1000 worth of stock. The upside: it was fairly probable that the stock would rebound the following week. The downside: the firm could have failed, and I’d be a lot more occupied with finding a new job than with the loss of 1k. So what happened? I chickened out. The stock is now hovering around $20 (I could have tripled my money in a couple of weeks). And I still have a job. Now, considering your larger theme… is that a good thing?

    Like

  50. The talk of risk above reminds me of a business writer relating in a book (sorry, forget its title) a paragraph or two about an academic symposium whose subject was the “entrepreneurial spirit.” Professor after professor presented paper after paper and said comment after comment about how entrepreneurs are “risk takers” and love to take risks, and that risk was part and parcel of being an entrepreneur. Finally, a man stood who actually WAS an entrepreneur (not an academic) and said, “I can’t believe what I’m hearing! I’m an entrepreneur and I do everything I can to AVOID risk, and I know a lot of entrepreneurs and they all do whatever they can to avoid risk, too! Risk taking is NOT endemic in the entrepreneurial personality.”

    Like

  51. I should add to my above comment a quote from late billionaire Mark McCormack (who made most of his fortune in sports management): (paraphrase): “Close victories in sports are thrilling. Close victories in business are anything but!” He was asked repeatedly why he managed pro athletes and not rock stars, since they were temperamentally alike. He said, “Rock and roll management has too much competition.”

    Like

  52. Suggestions for first time investors:
    How to choose a broker
    Online trading? Good idea or not?
    Differences between online and in person.
    How to start.

    Thanx, Tim. Excellent post. Excellent blog actually. Loves it.

    Amanda
    Peace

    Like

  53. Excellent points by all but I would like to hear back from Tim on a few of the questions posed him. I have co-founded [a] website… that helps sort through the huge pile of information out there. Hopefully it will provide a valuable education to those seeking a “when to act” issue.

    Like

  54. Tim –

    I understand your asset allocation and don’t think it is ridiculous at all. In fact, it probably is consistent with a 4HWW lifestyle and philosophy – fire & forget. In nominal terms, you probably won’t lose money (unless your bond allocation is predominantly high yield and preferred – then that’s another story. Fixed income won’t however completely get you around the risks of inflation and currency devaluations, although TIPS might help with that, but no guarantee. In any case, the current world seems deflationary so that may be less of an immediate issue. Kudos on your one quote where cash was also mentioned as an asset class – remember, that can be cash in a multitude of currencies when needed, not just the dollar. Interestingly, that approach is advocated in some of the voluntary simplicity texts – ‘Your money or your life’ comes to mind first. (http://www.yourmoneyoryourlife.org/)

    I’m enjoying mulling your methods which I do think make a lot of sense, but would prefer to approach them from (relative) affluence. You don’t need to be an accountant to recognize that a $1,000,000 USD portfolio of municipal bonds yielding about 5% (possible with closed end funds at discounts, +/- leverage) gives you $50K of tax free income withougt depleting your capital. Well, if you have your home/cars/kids college educations paid off, you’re pretty much free and clear to live without fear, if not ostentatiously. If you and your spouse can earn $50K each through your muse, $150K gives you probably a fantastic life/work balance point. (I’ll let you know when I get there) When you get to 65-70, annuitize it and enjoy yourself until you die as well. Sell the home, become a perpetual traveler, and minimize maintenence costs and inheritance taxes to boot.

    Now, if I can just get to that number above…

    Like

  55. Hi Tim, Hi everybody,

    With all due respect, most of the comments on investing on stock markets don’t help anyone. I’m no mister Right. There is no magical recipe. But there are facts and techniques. And facts can be shown and techniques can be taught, understood and eventually mastered.
    In a nutshell…much little nutshell:
    Yes you can start with as little as $10,000. And yes, stock markets are sharks market! Be aware!
    First of all: there are 2 types of people: The one who can handle their own investment in stocks and the one who can’t. No problem for the latter you’ll have “only” one question to ask your financial advisor to insure yourself to be in good hands. I’ll tell you as you read. For most people, selling is the problem. I’m also a victim of my own cupidity sometimes. …What can we do?
    Second: There are basically 2 “schools of thought” in the brokers/investors business. One is the traditional one which is usually called: the “Fundamental Technique”. It represents most of the formation for the future brokers and the philosophy of corporate investment firms and brokerage firms. The second school of thought is the “Technical Analysis”. Thanks to Stan Weinstein, John J. Murphy, Martin Pring, Michel Carignan and many more.
    Well, the first one consists of studying and scrutinizing every aspect of the company in which you would want to invest in. Do you have the time to search and read tons of documents and…understand them? If you do, how late are you “in the news” compared to all these people involved in defining and typing those documents?
    The Technical Analysis (T.A.) is virtually based on one single fact: (Oups! Here’s for the Pareto’s Law!) Almost 85% of all the money on the stock exchange market comes from what is called: corporate funds. In other words, if all private investors (15%) should cash in their stocks at the same time, it wouldn’t affect the market that much.
    The T.A. teaches you basically 2 things: First, to read the graphics in order to see what the “big guys” are doing? Are they laying aside, jumping in or flushing their placing? In other words, you surf on the big guys’ tide.
    Second, it teaches you how to secure yourself on short term (days) whether the title goes up as predicted or down (with minimum lost) as one bad luck or wrongly rated. And if it did go up, how to profit on your edge and protect it against any lost.
    It also shows you to test your ability without any real money poured in and how to enter step by step to secure your portfolio.
    This said, except if you are an expert (and even then) citizens of the United States and Canada like me in Montréal, Québec that it is of no use to invest outside the American and Canadian markets (NYSE, NASDAQ, TSE, “Vancouver”, etc…)…although none of these markets are good to enter now (as of October 2008). It is not a patriotism thing it is only simpler and beneficial thing to do. Fortunately we have in Montreal a unique daily show analysing North American Markets with a Technical Analysis approach. The show is schedule to be aired live in an English version soon.
    I cannot tell you what to do with your money. I only can strongly suggest that you keep your money, learn, practice and see if you can be good at it (8 wins out of 10 tests…and don’t forget: it is easier on testing). Now it is NOT yet the time to buy. Good deals will become better deals. Flagship titles have dropped up to 5, 8, 10 times of their value in less than 2 months. When they will start their upward cycle again and your homework will confirm it then and only then, it will be time to move on (step by step) and I’m not the only one to say: if you did it right and checked your business, you will make tons of money. But not now (October 23rd, 2008). I admit, I take notes but, I do not trust anyone – even Mr. Buffet on a private consultation, I would still do my homework on the graphics before deciding. Sorry for the fans!
    And here’s for the non-investors: Ask your financial advisor if he is familiar with the Technical Analysis and mostly: ask him how much of his investment decisions are based on his homework with the Technical Analysis? If he answers: Technical Analysis plays for 85% of my decision when it comes to invest. You got your man! Investigate by yourself and see how Technical Analysis Investors who did their homework are all in cash right now, waiting for the right moment to surf in alongside the big sharks…
    Well, I hope it can shed some light on some topics regarding the stock market and demystify some of the false beliefs. Regards, Simon Lee

    Like

  56. Huge fan and long time reader. But I’m just not sure exactly what you are getting at?

    So once you have micro tested and determined your risk tolerance you can make plan according to it?

    What is risk tolerance? My understanding is really the ability to handle situations taking bad or unknown turn.

    Don’t you think by fear setting you can define how much you are prepared to lose, do a cost benifit involving predefined goals. i.e

    Are you trying to come up with a long term secure plan?
    Are just trying to find the fastest way to make alot of money?
    Are you using the 80/20 to find the easiest way to make money?

    and then make a choice from there?

    From there determine key factor use by those who have been there. Distill this into a plan, micro test certain strageies either in isolation or combonation.

    Things such as

    historical data
    Emotion involment (if you know that people are emotionally involved in the market play off it)
    Quailty
    Hype
    Innovation
    Countless other things

    Defining could be this list could as simple as 80 20 the best performing stocks. Find the most comman threads through well performing stocks. Test these. Hell, get some people in india to do that for you.

    THIS IS really just your advice applied in a different area.

    Personally I’m more interested in your experience with actual testing parts. Like how to know when you have expanded enough to contract without missing key concepts?
    How to fear set missing key concepts?
    How to stream new knowledge into a self imposed information exile?
    Basically how to strike a balance between being dogmatic and being on information overload (i guess from fear of missing out on something important)?

    Aside: Does ? go after or before brackets? Can never remember.

    Braydon

    Like

  57. Oh! by the way Amanda,

    There are a few but trusty and very good online traders on the market these days.
    Whom ever you choose, you should never signed with someone who charges more than 10 dollars per trade. Even if you only do one trade a month.
    Most have special deals (free trades, etc) if you have $25,000 to invest.
    Some propose everything free with real time state of the art platform if you have a quarter of million to invest. But never more than $10 a trade for the low budget investor.
    Good luck!
    Simon Lee

    Like

  58. I am a professional stock and option trader, so I spend all of my days working to understand markets and investing principles. I recommend William O’Neill’s How To Make Money In Stocks, as well as his Investor’s Business Daily site. As O’Neill points out, stock winners show accelerating earnings and revenue growth, and have specific characteristics. Cut losses quickly, and let your winners run.

    As an investor, the first decision you need to make is how actively you want to be involved in your own investing. If you have someone else do it, make sure you get some reliable information about past return. If you are going to do it yourself, you need to commit the time. Be skeptical of mainstream media permabulls. Realize that the world has changed as a result of this crisis, and it may be quite some time before a buy-and-hold strategy will work again.

    In the near term, look toward commodities and related stocks. Once we see light at the end of the tunnel, look for emerging markets and technology to regain their leadership status.

    Like

  59. Tim,

    Thanks for quoting my comment in your blog post… I’m glad to be helpful.

    One other piece of advice I’d give to somebody as conservative as you is this: THE STOCK MARKET IS RIGGED.

    Its human nature… once there is a financial incentive to cheat, people will cheat. Insiders know both how to cheat, and not get caught. Big fortunes are made because of barely legal bribes that yield barely legal insider information. The individual investor is usually a sucker, ripe for the picking.

    Where does this leave you? Out of the game? No… you simply need to understand how to make money on a rigged game. You need to use “investment judo”, to use the insider’s knowledge against them. You need to think hard about how somebody could rig the system, then invest in such a way to minimize the negative effects on you. I have some tips here [URL].

    Also, always keep this in mind: YOUR STOCK BROKER IS A SALESMAN.

    Repeat both of those statements ten times whenever you get the urge to invest. If you still feel good about your purchase, then it was probably a good deal.

    Other than that, asset allocation is key… but even then it can be problematic. The whole point of allocation is to have groups of investments that have ups-and-downs at different times. Basic example, gold is usually up when stocks are down, and vice versa. So people can hedge their bets: when one investment is up, sell it, and “rebalance” your portfolio by purchasing what’s down. Buy low, sell high, basic stuff.

    However… if EVERYBODY uses the same formula for asset allocation, then suddenly all the assets in the stock market are TIGHTLY coupled. When one goes down, they ALL go down. The current market collapse has something to do with this fact: everybody used the same formulas, but the geniuses who developed those formula didn’t do the math properly. They accounted for market risk, but ignored capital risk… which is the basic fact that credit gets more expensive during a recession.

    So be weary… take a simple formula that everybody is using, figure out how it could be rigged, then make sure you can dodge the con.

    Like

  60. Timothy,

    What you are trying to do is just like the usual internet marketing seminar junkies. (usually very unfit, bold, and don’t know how to dress well, and have very bad posture, AND have no social life)

    “Hey I’ve been testing a new back ground color on my salesletter page, and I got 0.002% better response rate!! Isn’t it so awesome?”

    “dude, that’s nothing! Look what I’ve been doing, I’m testing new P.P.P.P.S line and I got 0.003% better response rate! I’m so genius!”

    Who cares how much yield you get from your fricking investment. OK, in 30 years it will make a huge difference, but hey when you are 60 something year old, do you really care whether you have a $17 million or $237 million? Of course it will be awesome having that much money. But what are you gonna do with extra $220 million? Really.
    ($17M = if you get 10% growth from index fund)
    ($237M = if you become a Warren Buffett and get 20% growth)

    Just be happy with sure $17 million my friend. Trying to be Warren and you mostly like will have less than $17 million by too many mistakes.

    Go for the sure way and enjoy your life.

    Don’t be like weird seminar junkies.

    Like

  61. +1 Drsteph

    At some point you have to decide how much $ you want. Once you have all your needs covered, why risk your hard-earned $ just to earn more – esp. if your portfolio keeps you awake at night? As the above poster suggests, a million USD can give you a nice income.

    If I had a business which generated enough income to live, the ability and drive to continue to work into my old age, and a million $ I think my asset allocation would focus on preservation of capital, too. Although I don’t have the data to back this up, I think if you examine the portfolios of millionaires you will find that they keep more of their wealth in “conservative” investments like real estate and bonds than in stocks.

    I’m looking forward to the next post — esp. “redefining ‘investment’, and questioning the wisdom and pillars of retirement planning altogether.” Surely if retirement is obsolete, then retirement planning — which suggests you must balance your portfolio between equities and fixed income — is as well?

    Like

  62. “Anybody who plays the stock market not as an insider is like a man buying cows in the moonlight.”
    – Daniel Drew, 19th century speculator

    Look for investment vehicles that compliment the 4HWW lifestyle and that offer good cash flow. Investments you have to worry about like options trading are not worth it.

    Like

  63. Looking forward to the second part. I love the test everything approach. It’s been a long time since I read your book. I’m working on my second business with a muse business model. In another year or two I might actually have some money to start investing.

    On a second note, I’ve been working on a small marketing campaign for Barack Obama. Tim I was hoping you could post this video and ask people to spread it.

    Check out this video –> http://www.vimeo.com/1891426#success

    “Vote For Hope”

    “With the 2008 presidential election, Americans face a pivotal choice between not just two candidates, but two paradigms. We need someone who understands the complexity of our time. Someone who believes in investing in renewable energy, in education, in women’s rights, in civil rights, in healthcare for Americans. Someone who believes in dealing with global issues with diplomacy so we can restore our respect in the world. Barack Obama represents the change we need and can lead us into a brighter future.”

    Like

  64. Ok, I could use some validation.

    My wife and I both have stable jobs and no kids. We take a good chunk of our overall take-home, about 15%, after our 401ks, and invest with Fidelity. I’ve been following the philosophies of the “Lazy Portfolio” so we invest 60% in a total market index fund, 30% in an international index fund, and 10% in a bond fund. We put money in automatically every month and I put in some small book royalties every year to help balance it out and keep it at that percentage allocation.

    Our 401ks are invested in various funds but mine is all in the Fidelity Four in One fund – a fund of four index funds spread out much like the allocation above. It has a higher fee but it self balances so I never have to worry about balancing it. The fee is still well under many managed fees.

    So, looking at the market right now, my house value tanked and we just bought our house two years ago so we’re real close to owing more than the value. I can hope it goes up but we’ll see. Anyway, we can afford it so I’m not worried. I do have a 7 year ARM due up in 5 years and that makes me nervous, but trying to refinance now, with the value so low, would be a mistake I think.

    The good news is we both have stable jobs and no dependents so we’re able to save a lot and still enjoy our lives. We’re not on the 4 hour work week yet, but we aren’t burning ourselves out – we enjoy our lives every day.

    So my question is, is the idea of the Lazy Portfolio a good one for someone who isn’t drawing out for at least ten years and doesn’t want to spend significant time playing the market?

    Thanks for any advice. Great article.

    Like

  65. Hey tim (thanks!!)

    About investing and stocks i warmly recommend reading Nicholas Taleb books “The black swan”. It’s a wonderful enlightment on how things works.

    Loved the video and can’t wait to see Part 2.

    I don’t think that stocks works with 4HWW lifestyle (but you are the expert !). How much time do you take/plan to manage your investment ?

    Like

  66. Tim,

    Great post! I’ve actually created a nice muse from “active investing”. For income, I trade the e-mini futures contracts. And with the four-hour-work-week in practice, I trade a maximum of 90 minutes a day and can work from anywhere, which allows me to travel as much as I like. With the substantial income provided from day trading e-minis, I am able to reinvest in different markets, all the while implementing the same day trading strategies into my longer-term investments.

    Take a peek at my blog.

    My best,

    Chris Dunn

    Like

  67. My company slogan has long been “Rethink Investing” so this type of conversation is close to my heart.

    Unfortunately, Tim, you haven’t begun to rethink investing at all. Everything you speak of is within the confines of the publicly traded securities market.

    That’s on par with confining your entertainment to television. I think you can do better than that.

    – Jeff

    Like

  68. Here’s my second two cents: There are a lot of comments on this page, but the most useful were from:

    Sarah
    Jay
    Tanveer
    Bex
    Steve metz

    I urge everyone to search this page and read and re-read their comments.

    Like

  69. Just wanted to offer some unsolicited advice for Mike. I would strongly suggest you rethink your decision to hold onto that 7 year ARM, and consider moving into a fixed mortgage. A few points in that regard:

    – Interest rates are currently very low. We may get another rate cut as soon as next week, but eventually government monetary activities are likely to force interest rates higher. We definitely could revisit the 1970’s with sky high interest rates, and high inflation as well. If you wait too long, you could put a lot at risk, including the possibility that you may have trouble finding a new loan when you want it (maybe you or your wife loses a job, lending standards get even tougher, etc.). If rates go up quickly, you may end up in a forced re-fi with much higher payments than now, plus you might be underwater in your house in terms of value. Not a good scenario. The safer move is to lock in low rates now. Safe is good in this environment.
    – The economic crisis is larger than most people realize, even after seeing the market damage to date. I wrote a Kos diary on the subject a couple of weeks ago, which you can read here:

    http://www.dailykos.com/story/2008/10/14/6245/4338/582/629960

    or at my blog:
    http://www.groovinator.blogspot.com

    Essentially, consider that so far we are seeing market damage due primarily to the credit crisis. Nobody knows whether the credit crisis will be contained soon, or how extensive the world recession will be. Home values have declined substantially during a time of relatively good employment numbers. The next stage of this crisis is likely to drive unemployment much higher, with resulting impact on housing and the equity markets. Do not underestimate the potential for continued reduction in asset values, including both stocks and home values. In such an environment, preservation of capital should be the paramount concern, with capital appreciation secondary. Also consider the strong possibility of building inflationary pressures as central governments create more cash, and address increasing indebtedness by devaluing currencies, including the dollar.

    You want your investments to have a good probability of success, and that does not describe the stock market right now, or real estate. A better plan for the less-involved investor is to take the time to find an investment professional who can clearly demonstrate that he/she has been able to preserve client capital through this downturn. This crisis has served to differentiate good quality advisers from those who simply follow a buy-and-hold/diversification mantra without really understanding market fundamentals. A talent for protecting capital will continue to be important, as the investment environment will continue to be challenging.

    Like

  70. Jose, allow me to rephrase my previous comments:

    @Tim – You have made a great success out of helping people to achieve more by challenging their beliefs relating to lifestyle. As fruitful as that has been for you and those you have helped, would it also make sense to challenge common beliefs about investing?

    @Sarah – I’ve been thinking for some time that somebody should publish data of markets priced in gold. Thanks for the link ;-)

    @Jay – VERY insightful. Economic wisdom is MUCH more important today than investing wisdom… in fact investing “wisdom” requires economic wisdom. I think everyone would be quite surprised to discover the truths published by Mises.org

    Like

  71. Also,

    Let’s please go ahead and call “investing” what it is, so that whoever reads this, if anyone reads this, you can’t castrate me by saying what I am doing is not investing.

    Investing is betting. Pure and simple, betting is what it is. Do you think Warren Buffet dropped 10 billion bucks into those companies because he likes them a lot and hopes they do well? Hell no! He did what he did because he thinks those guys are going to make him money. He is betting on it in fact.

    If you really want to play in the markets, diversification is not the answer. Especially in times like these.

    Defining risk tolerance is not the answer.

    Neither is asking Warren Buffet.

    The goal is to buy something today that will be worth considerably more tomorrow or at some future time. That is asking a lot considering I don’t know any humans that can predict the future with a strong degree of accuracy.

    There is a huge, huge variety of options you have on your plate when you decide to play in the market. You can buy stocks, bonds, mutual funds, ETFs, REIFs, etc. You can buy long on the margin. You can buy short on the margin. You can seek more leverage by buying long calls or long puts. You can even create your own calls and puts and sell them (when you guess right, its like printing your own money, but extremely risky because an option is a contract that if you sell, you are responsible to make good on it). There are these new cool things called FRO – fixed return options–that give you a fixed return when you call it right and go to zero when you guess wrong (upside is limited–I wouldn’t buy them, but I am considering writing them and selling them).

    With all these things to consider, is today going to be an up day? Hard to tell, but until a strong GDP number comes back, it is a safe bet that tomorrow will be down and if it’s not, a safer bet still that the next day will be. The same is true after a strong GDP number hits. When a strong GDP number comes in, markets have more up days than down days as a general rule. If you guess wrong the first day you enter the market, you have a pretty good chance that it will rebound soon–within 5-7 trading days. If you make trades based on this mentality, you would be wise to keep a lot of your money out of the market so you can lower your average cost on those days that you don’t quite guess write.

    I’ve been experimenting with some things for the past 16 months or so. At first, I bought calls on China Mobile (CHL) and China Life (LFC). Those were my first two moves in the market and I was fortunate to hit it right and nearly doubled my investment and sold strait away. I did a few more plays with these companies making a few dollars here and there and then I started buying calls on Google (GOOG). I have made about 250-300 trades since I have started. My trade fees alone were over 100% of the amount that I originally started with.

    Google has made me so much money in call options it really is unbelievable. After about a year of doing this, I started to loose. As a matter of fact, I lost all the money I made in the market and then some. Then I stepped back, took a deep breath and I started buying puts. I didn’t like the idea at all. I don’t like making bank when others are suffering. I was in a very torn situation emotionally about it, but I was making money and not harming or causing the downward trend. I kept buying puts, and I still am buying puts and I regained all my original play money, plus about 120% annualized. I felt good about that so I took all of my original money off the table plus 20%. I have one put contract on Google right now actually. (Futures are up, I might loose some on this Monday)

    I am 22 years old and I graduate from college with a degree in Economics and a separate degree in Marketing in December. A lot of really smart people think I am unwise. A lot of them don’t think I should be “investing” this way. Don’t get me wrong, I’ll have some more losers probably, but my strategy provides me with a lot of flexibility, regardless of what the market is doing. To me, that flexibility is my biggest strength. If I screw up today, I can learn from it and readjust and play again. If they screw up with their extremely long term plans and goals and asset allocations and 10% here 20% there, they cannot adjust. They have little flexibility. I need them though. I need them to move the market the way I think it will move. I need them to panic and sell or get over confident and buy.

    I’m not here to qualify myself, but I do see a problem with “Investing”.

    With “investing”, the risks are defined. You know the maximum amount you can loose. Yet so many people play with money that they can’t loose. They justify this because it is “investing” and not “gambling”. Folks, if you invest, be prepared to loose it all, because that can happen. If you want a situation where the most diversified portfolio is screwed think about what the Russian government did to their markets. They closed them. No buys, no sells, no market, no money. I’m not saying that the U.S. will ever do that, but if it happened, would you be ok? Could you still buy food and pay your mortgage? Yes, I know, that is the worst case scenario, but a probability exists that the market will close completely and you will loose all of your money you have “invested.”

    My advice to people is only play with money you can loose and still survive with a decent retirement because there are a lot of big boys, and girls, that survive off of you in the market. Don’t throw yourself in the sacrificial furnace because of what some financial adviser tells you.

    Like

  72. Tim,

    I just viewed that Matt Lauer “TODAY” show interview, and I thought it was a bogus interview, and VERY disrespectful toward you.

    Donny Deutch, who was handed a successful NYC Advertising Agency by his father, and who never had to work a day in his life, totally pounced on you, telling you that you don’t know what you’re talking about, and that everyone who is “Successful” works 60-90 hours per week.

    I was especially incensed when Donny put his hand on your shoulder and said…”You look like such a nice young man”……with little experience, and you’re wrong.

    I wish you had said…”Donny, do you think your minions who slave away for you at your offices would agree with you?…I think not.”

    I have read your book twice, and I think you’re telling us to get MORE out of our lives than just working for a Paycheck…and “WORKING” on what WE want to work on, WHEN WE want to work on it.

    Obviously Donny Deutch hasn’t read your book. You NEVER said anything about NOT working…you said to be Ultra-Productive and work 4 hours to make our pay to live on, and then WORK on whatever it is that we REALLY want to work on.

    That is the BEST Message I have ever heard from ANYONE in my entire life.

    That interview probably bothered me more than it did you. I was outraged, and I think I will email Donny Duetch to tell him what an arrogant and uniformed ass he was.

    Keep up the great work!

    Joe

    Like

  73. Tim,

    Excellent post. Loved how you explained that you’re still actually quite conservative despite your progressive views on lifestyle. Investing is an incredibly misunderstood term and concept.

    Investment or investing[1] is a term with several closely-related meanings in business management, finance and economics, related to saving or deferring consumption. An asset is usually purchased, or equivalently a deposit is made in a bank, in hopes of getting a future return or interest from it. The word originates in the Latin “vestis”, meaning garment, and refers to the act of putting things (money or other claims to resources) into others’ pockets. See Invest.[citation needed]. The basic meaning of the term being an asset held to have some recurring or capital gains. It is an asset that is expected to give returns without any work on the asset per se.

    I was shocked to find that the last phrase suggested that there are expected returns without any “work” involved. That seems both comical and inaccurate to me. I tend to find that successful “investors” are those who are realistic, as they expect to “work” on their investments. By “work” I mean manage your investments, not painting the walls. I did that type of “work” in the beginning of my real estate career, however I “work” by simply managing my investments now. I don’t own a single stock, just cash and houses

    I invest in real estate and nothing else. My returns are incredible and actually infinite as I utilize the bank’s money exclusively. Stocks, bonds, funds etc. can be extremely risky when compared to rental real estate that has been properly purchased and executed with a 4hww mentality. It’s actually quite counter-intuitive that funds are more risky than real estate, but it’s true if you know what you’re doing.

    Your book and philosophy on work/life/business perfectly complement my philosophy on investing and my rental real estate program. I’ve given out several copies of your book to my investors who thoroughly enjoy it. The time intensive landlord model of real estate investing is as obsolete as working 9-5 for a Corporate America. Great Post.

    Like

  74. The title of this blog post is all wrong. Think about it, Tim: If you don’t completely understand what you are “investing” in, or if you can not personally control the course of any of these “investments,” then you aren’t investing, you’re speculating. Gambling. The very fact that you are focusing on both “risk tolerance” and “asset allocation” only proves this point.

    I personally only invest in what I both control and understand, and it seems a clever guy like you wouldn’t have such a hard time doing likewise. “Financial planners” – even the ones who are handling Britney Spears’ portfolio – will only recommend the “investments” that earn them fees and commissions, all of which turn out to be the very worst possible investments, especially considering the US Dollar’s upcoming voyage down the toilet.

    Ask yourself: Could it be possible that there are better investments available to me that don’t make my broker any money? Investments that they will never talk to me about?

    Like

  75. VERY DIFFERENT STRATEGY. i differ from the conventional wisdom here. no stocks, bonds or mutual funds — their performance is outside my control. i’m 100% in boston/cambridge multifamilies (3-4 unit buildings). i have been buying property since 2003. i live cheaply but well, off my cashflow and am young and semi-retired. i like to travel and in 2008 alone i went to London, Paris, New York, Montreal and Chicago. i’ll be leaving again this week to get away for the winter: christmas in London, new year in Paris, and sunny Bangalore in Jan 2009. yes, i’ve made mine an e-business (e-leases, online rent collection, emergency maintenance person only, etc.)

    BACK TO BASICS. i’m originally a techie/geek (systems architect & analyst) and don’t know much about business, but i do know people need a home before they need Coca Cola or a cell phone. so i invest in rental property, not Coca Cola stocks or Verizon. in this way, i play conservatively.

    UPSIDE OF DOWN MARKET. about the down market is that RENTS ARE UP. yes, because no one is buying property, most people are renting and so demand is up. my “No Vacancy” sign went up (metaphorically) a full 30 days earlier from last year. i am looking to buy good property, but even in this market, good deals are hard to come by.

    LOOKING FOR 10% RETURN HEDGE. the only hedge that i am looking into is to put money into mutual funds or government secured funds in india (my country of birth). the indian economy is strong at the moment, and i have some money in a HELOC at a 10% interest rate that i want to move elsewhere, outside the lender’s control. this is because they have frozen this secured line of credit once before and may well do it again. so i am looking for something that pays out 8-10% with little to no volatility (to cover the cost of borrowing the money). this is the money i use to finance new acquisitions.

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  76. Tim,

    actually all the advise of those experts is wrong including almost all of your reader’s comments. The only comments worth reading are those by Ben and Tanveer, which seem the only one’s who know what they are talking about.

    How much would diversification have helped you the last few weeks? Not much, as evidenced by the extremely high correlation across all markets.Buffet? Read “Fooled by Randomness” by Taleb and think about whether Buffet wasn’t just a lucky guy.

    Here is my advice: Don’t invest into anything, even so called “risk free” U.S. government bonds are pretty high risk if you think about it. How much are these gonna be worth if the U.S. defaults on their debt? 0. What’s the likelyhood? I don’t know, but what I do know is that they will never be able to pay off their debt. Would you lend someone money if you knew that they would never be able to pay you back?

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  77. I don’t know how many of the people here actually invested before, but let me give you real life examples of what can happen.

    – Losing 30% of your money on an insider tip.

    – Losing 50% of your money on the guaranteed insider tip.

    – Losing 20% following a guy who made 20k in one day and is a master at a specific stock… on that same stock.

    – Selling at 7% gain only to see your stock climb 60% in the next week.

    – Your recession proof stock going down 30% after being virtually unaffected all September.

    Just remember these few things, some men smarter than I discovered them to be true:

    1. Nobody knows what will happen in the market. Not a soul

    2. There is no guarantee anything will go as you think it will

    3. Wishing you have sold is more painful than greed – disappointment that you didn’t buy a stock that went up.

    4. Anyone can buy a stock, selling that stock takes real balls.

    5. Unless you can outright own a part of the company, you are most likely to get hosed by the big guys. Invest in things you can control instead.

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  78. “Here is my advice: Don’t invest into anything, even so called “risk free” U.S. government bonds are pretty high risk if you think about it. How much are these gonna be worth if the U.S. defaults on their debt? 0. What’s the likelyhood? I don’t know, but what I do know is that they will never be able to pay off their debt. Would you lend someone money if you knew that they would never be able to pay you back?”

    There is no true “non-investment” except giving it away to charity. Even cash is an investment. It’s like that line from Rush: “If you choose not to decide
    You still have made a choice”

    Your investments are worth the cash that they throw off in the form of earnings, interest and dividends minus taxes and inflation. Few people involved in the markets are actually investors; most are just chasing price movements. These stock “investors” are hoping for someone to pay more for their piece of paper than they paid.

    Personally, I invest in stocks and other securities because of the convenience factor. It’s the easiest investment vehicle, in the long run, to earn a yield in excess of inflation. I don’t want to be a landlord, or take on huge amounts of debt – so real estate is out – and I work full-time as an employee so I don’t have time to own/manage a business that I can control. I’m young yet my portfolio is relatively conservative, a mixture of long-term investments that have growth potential (equities), pay income (bonds, closed-end funds, REIT’s), and inflation hedges (precious metals).

    If I ever get to $1M USD I’ll concentrate on income-generating inflation hedges like real estate.

    “How much would diversification have helped you the last few weeks?”

    Being down only 10 or 20% sure beats the losses suffered by some equity-only investors. Some sectors have already recovered so even diversifying within the market would help you avoid the catastrophic losses some have suffered by concentrating in the wrong sectors like finance or commodities.

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  79. Tim, lots of opinions. My suggestion is follow the evidence. The evidence demonstrates that the largest asset class for the wealthy is real estate. Not only personal residences (where folks have 2-3-4 or more) but investment property. Since you have plenty of cash flow, you can leverage the real estate investment, but not so far as to preclude cash flow. These assets are also great for taxes with lots of tax advantages. Finally, you will be able to leave a legacy to your eventual heirs that could last for generations. Learn as much as you can about real estate investing obviously, but there are many experienced folks out there to guide you. Now here is the other suggestion. Instead of trying to beat Warren Buffett, join him. Take 20-30% and buy BRKbs. No tax issues until you sell, highly liquid, and talk about low expenses! Remember that Berkshire Hathaway own outright over 60 companies and large stock blocks of at least 10 more companies so it is well diversified. And you can’t beat its performance (21% over 44 years).

    So here is what the evidence on wealth tells us. Invest 60-80% of your investable $$ in cash flowing investment real estate with good fundamentals. Invest the other percentage in a niche business or stock of a niche business (my choice is Berkshire Hathaway) again based on fundamental research. A couple of hours a month reading about the economy and thinking about your investments is all you need from there on out. If you don’t know what fundamental research is for stocks or real estate there are many books on this subject.

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