With 2020 nearly wrapped up, I think we can all agree it’s been a very difficult year. As the old saying goes, “The only constant in life is change”, and that was certainly true in 2020! The world is a constantly changing place… this year especially!
Despite 2020 being one of the worst years economically in recent memory, the stock market was actually up in 2020. Which seems a bit strange at first, but it probably has more to do with extremely low interest rates rather than improving corporate profitability.
It’s the one shiningly positive part of 2020 everyone can look back at!
But let’s not fool ourselves, the stock market can and will change its tune at any time. Next year could be a terrible year.
Most people invest with the hope the stock market is going to go up — They hope to make money, but in reality have zero control over what the stock market is going to do. They invest their money, and then hope for the best.
“Up! Up! Up!” go the chants of the hopeful.
Is this actually investing? Or is it speculation? To me, it’s speculation. Gambling. It’s no different than sitting down at a casino, and putting your money on the table.
This year investors got lucky. They rolled the dice and won … this time. What about next year?
Hope Is Not A Strategy
“Hope is not a strategy.” A very smart person once told me this, and he was absolutely right. It’s a philosophy that I’ve carried with me for years, and one I want to share it with you today.
Winning (or succeeding) is not about relying on hope. Hope brings success only if your lucky. Strategy is about being prepared for many potential outcomes, and finding a way to win regardless of whichever outcome happens.
This is the difference between investors and speculators. Real investors invest with a strategy and they can make profits in all kinds of markets. They also stick to a strategy instead of getting sucked into whatever’s fashionable that year.
While it might seem like a smart strategy to buy into whatever stock has momentum (like Tesla this year, which did incredible), sooner or later you’re going to make a big mistake. This is not a true strategy. It relies on luck.
Remember, Wall Street is anything but a constant and steady earner. One year internet companies might be in fashion (like in 2020). Other years it might be value stocks or airlines that are in-vogue. Who knows!
Without a true strategy, we are subject to the whims of the market. Will the next decade be a positive one? Maybe. I have no idea what the stock market might do, but I do know that real investors will find a way to profit regardless of what Mr. Market is doing.
This is what it means to have a strategy, and why the ultra-wealthy will always find ways to grow richer.
Luck has very little to do with it.
Learning Strategy From The Ultra-Wealthy
When it comes right down to it, I’ve been pretty lucky in life. Not because I’ve picked all the right stocks, but because I’ve had the opportunity to learn about investing from a few extremely wealthy people. I’ve had the opportunity to see up-close what a strategy can do for a investor.
(Note: I consider those with a net worth of $10 million or more to be ultra-wealthy).
A few things have stood-out to me about their financial strategies:
- Their success is NOT dependent on the stock market being agreeable. They will be wealthy even if stock prices are flat for a decade. If stock prices go up, they’ll just be even wealthier.
- Most of these ultra-wealthy investors took years to develop their winning investment strategy. Knowledge had to be gained, and this took time. They didn’t start out as winners immediately.
- They’re usually well diversified, with assets uncorrelated from one another. Assets both inside and outside the stock market.
- Most of these ultra-wealthy investors have a steady and reliable cash flow engine. For a few, this means a very high paying job. For others, it’s a business they own that spits of a steady stream of cash.
- They’re highly opportunistic. They can smell a change in the wind and aren’t afraid to take advantage of those changes. Change isn’t a bad thing. Change means opportunity.
Notice I didn’t say anything about hunting for fast growing investments? While growth is important, it also attracts competition. Competition usually kills profitability.
Most of the ultra-wealthy investors I’ve known have actually made the bulk of their money in slow growing (but reliable businesses) — rental apartments, concrete, coffee shops, retail stores, and even bonds.
Those are all slow-growth assets/industries! It wasn’t industry growth that made them wealthy, but the strategy they used.
Most people discount strategy these days, and instead focus on growth. They assume growth will continue forever, and rely primarily on what’s called “The greater fool theory” — Investing in the hope of finding a greater fool with which to sell to.
Developing Your Own Strategy
No one can accurately predict the future. The sooner you accept this, the sooner you can get your head screwed-on the right way and start building a investing strategy.
Because we can’t predict the future, it’s important to design a strategy to succeed under a variety of potential outcomes.
Be prepared for some investments to NOT work out. That’s just part of the game. How you deal with those bad investments should be a major part of your strategy.
Personally, my strategy employs a scorecard for every investment. I update and evaluate that scorecard regularly. I do this at least once a year, if not more often. This strategy works for me because it takes the emotion out of my investing decisions. I can make objective decisions based on hard metrics that I’ve selected.
And this works for me. Your strategy will be entirely different from mine. Find one that works for you.
The important part is that a strategy should be more than “hoping for the best”. Not all investments are going to be winners. A strategy should work in both up and down markets.
What are you going to do when an investment doesn’t work out? Sell it? Buy more? Sometimes it makes sense to double down, and other times it makes sense to cut your losses. Figure out a strategy to help you decide when to pull the plug on a investment before it can cause major damage to your portfolio.
When it comes to winners, my strategy is to mostly let my winners run. They win, and keep winning because they have a the ability to compounding continuously… and that’s super important. As long as I can see the results of the compounding, I will continue to hold those stocks (even if they’re down in a given year).
When designing a strategy, ask yourself “How will those investments compound?” If the investment is going to retain cash (internal compounding), how is that cash being invested? What rate of return are they earning on that retained cash? If the company pays a dividend, will you reinvest that dividend (external compounding)?
If you’re going to keep earning in both up and down markets, compounding really matters. This is one of the reasons why I’m so ultra-focused on always making certain I’m compounding.. It’s a major part of my strategy, and one that’s paid off.
Either You Get It Or You Don’t
Now obviously there many ways to invest, and not everyone is going to agree with me on the importance of a strategy. That’s totally OK. Either you understand the importance of a strategy or you don’t. It takes all sorts of people to make a market.
For me, when I finally understood the difference an investing strategy brings to the table, it was like a lightbulb going on in my head. I suddenly understood why some investors actually grow wealthier in down markets. It’s not luck, it’s strategy.
Ever since that lightbulb went on, I’ve endeavored to invest without the need for ‘luck’ or ‘hope’. When done right, a true strategy makes investing almost like a mathematical certainty.
While hoping for a better future is still very important part of being a positive person, I’d much rather wager my hard-earned dollars on a mathematical certainty.
How about you? Do you invest with a strategy! Please share in the comments!