Sunday, May 12, 2019, Delray Beach, Florida


Notes From My Journal

My Partner Is Much Richer Than I Am – So Why Don’t I Invest Like He Does?

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Bill Bonner (partner/mentor/friend) made a massive fortune by investing 80% of his time and money in a single business. He is a cautious investor. But he’s also – from my perspective – a very courageous and committed investor. He sticks to one thing.

I’ve made my fortune, less impressive than Bill’s, by hedging my bets. I invest 80% of my time but less than half of my investible income on my main business. The rest is in proven, income-producing assets that grow without much prodding from me.

I don’t regret investing the way I do. Had I followed Bill’s path, my net worth might have been only a fraction of what it is today.

It comes down to this: To my mind, the most important factor in investment success has to do with psychology. Not the market’s insane psychology, but my own. That’s what I was thinking while reading an interview with Aswath Damodaran, a finance professor at NYU’s Stern School of Business, in Forbes recently.

I liked this bit particularly:

I tell people that the person you have to understand best to be a good investor is yourself. It’s not enough to understand what Warren Buffett does and [what] Peter Lynch does. It might surprise people, [but] I spend very little time reading investment books…

We live in a Google Search world. People think that if they search long enough, they can [find] answers to their questions, when in fact what they need to do is to stop and think about the questions and think through their answers.

We need to own our own investment philosophies. We need to think through what we think about markets.

If you have a deep understanding of macroeconomics, the investment markets, and you are a courageous and committed investor, you should invest the way Bill does. But if you have only a superficial understanding of those worlds and limited confidence, you may be better taking my approach: Work your ass off, focus on income, favor investments that you understand, and employ the three cardinal rules of investment safety: diversification, position sizing, and stop-loss strategies.

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Miscellaneous Essays

The Best Way to Get Funding For Your Business

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Last week, I suggested that it takes more than an idea – even if it’s a really fantastic idea – to attract potential investors. You need to prove that your idea has legs by turning it into a working model.

But then what? Once you’ve got a working model, where do you go for the money you need to turn it into a business?

In general, there are four sources of capital: venture capital firms, government agencies, commercial banks, and private investors or partners.

If you think your idea might be of interest to venture capitalists, check out the National Venture Capital Association (nvca.org). But for the average entrepreneur, venture capital isn’t a possibility.

As Paul Lawrence explained in his article “Raising Capital for Small Business Ventures”:

Yes, some venture capital firms will invest in new businesses, but such businesses are usually involved in technology or some other high-growth area. Frankly, for most small businesses, venture capital isn’t even an option. It’s rare for a small-business concept to have the kind of mammoth payoff venture capitalists look for.”

Plus, the cost of doing business with these companies is high. It’s basic economics. Their risk is high, so their reward must also be high. Even if you were to interest a venture capital company in your business, you’d be aghast at what they’d want in terms of their ownership position.

What about government grants? Tim Berry, author of Hurdle: The Book on Business Planning, points out that government funding agencies usually have “social” agendas. Grants and loans are available to minorities – especially minority businesses engaged in education, antidiscrimination projects, community services, fine arts, and other politically popular objectives.You can find out if your business idea might be a candidate for government money by checking into any of the government agencies whose purpose is to stimulate entrepreneurship. The best known is the Small Business Administration.

I wouldn’t advise taking this route, though. It requires too much bending to bureaucracy. Too much artificiality. Too much red tape. Getting these loans and grants takes months (or years) of filling out forms. And there are all sorts of reporting and regulatory requirements – enough to slow down even the most patient person. Plus, government-funded business projects have an extremely high failure rate once the funding is withdrawn. That’s because they begin with an idea, not a working model. And the idea isn’t good to begin with because it is based on social policy instead of being connected to profits – which is, after all, what fuels a business.

As for getting money from a commercial bank, I can make this short: Forget about it. The only way a bank will lend you money these days is if (a) you have excellent credit and (b) you can collateralize your loan with assets. If you have good credit and tons of money, you don’t need a bank loan. You can loan yourself the money.

This brings us to the fourth and final option…

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Miscellaneous Essays

How the “Big White Lie” of Investing Almost Cost Me My Retirement

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Originally published in the October 2011 issue of “The Palm Beach Letter“

I consider myself to be an expert of sorts on retirement. Not because I’ve studied the subject, but because I’ve retired three times.

Yes, I’m a three-time failure at retiring. But I’ve learned from my mistakes. Today, I’d like to tell you about the worst mistake retirees make.

It’s a very common mistake. Yet, I’ve never heard it mentioned by retirement experts. Nor have I read a word about it in retirement books. The biggest mistake retired people make is giving up all their active income.

When I say active income, I mean the money you make through your labor or through a business you own. Passive income refers to the income you get from social security, a pension, or from a retirement account. You can increase your active income by working more. But the only way you can increase your passive income is by getting higher rates of return on your investment (ROI).

When you give up your active income, two bad things happen:

First, your connection to your active income is cut off. With every month that passes, it becomes more difficult to get it back.

Second, your ability to make smart investment decisions drops because of your dependence on passive income.

Retirement is a wonderful idea: put a portion of your income into an investment account for forty years, and then withdraw from it for the rest of your life. Once you retire, you won’t have to work anymore. Instead, you will fill your days with fun activities: traveling, golfing, going to the movies, and visiting the kids and grandkids.

It’s a great idea. But it never actually worked.

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Miscellaneous Briefs

Investing, Speculating and Gambling: Let’s Get the Terms Straight

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One sensible way to acquire wealth is to buy shares of large, stable, cash-rich companies that pay dividends and hold them for a long time. (I am talking about investing in companies like Hershey’s and Coca Cola.)

This is called investing.

Most people do something else. They buy stocks of large, solid companies whose share prices they hope will increase for some reason. They buy them with the intention of selling them at a profit when they do.

This is called speculating.

Most people would not agree with that last statement. Most people – including most of the professional investment community – prefer to call this second type of financial activity investing too. They don’t like the negative connotation of speculating because it implies undue risk.

Ninety five percent of the investment activity in the world falls into this second category. Even the major media, on which the public relies for common sense, calls this type of transaction investing.

So what is the difference?

Any paperback dictionary will tell you that speculation is characterized by the fact that it is based on incomplete information. And when you buy a stock on the assumption that its share price will rise due to some anticipated short-term event, you are definitely relying on incomplete information.

For one thing, unless you have true inside information, you really have no idea that the event you are counting on will materialize. For another thing – and this is actually more important – you have no certain knowledge that the marketplace of investors will respond to that event by buying up the stock.

So this is one thing that every investor must understand: the difference between true investing, which is largely independent of specific future outcomes, and speculation, which is dependent on them.

If your broker or financial advisor is giving you this second kind of recommendation you must learn to recognize it as a speculation. Then, if you want to speculate, you can.

I am not saying that one should never speculate. (Although I should say this.) But I do think that if you are going to speculate you should not delude yourself by thinking you are making a sound investment.

There is a third way people buy stocks that deserves another name. I’m talking about investing in companies that are neither large nor well known but have the potential to enjoy large increases in their stock prices (which are generally cheap) due to some foreseen event.

The market calls such activities speculation but we should, to be honest, call this by another name. We should call it gambling. Gambling is defined as the purchase of an unlikely chance to profit. Any stock you buy whose chances of having its share prices go up over the long term (and virtually every cheap stock fits into this category) is a form of gambling.

Again, I am not saying that you should never gamble (though I should). I am just saying that you should know you are gambling when you do. Gambling – whether it is playing the slots or Keno, may be a fun way to spend your money. But only a fool would think that it is a way to increase one’s wealth.

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Miscellaneous Briefs

The Stock Game

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Photo: Helen D. Van Eaton

Good quotations about the Stock Game:

  • “There’s nothing wrong with cash. It gives you time to think.” (Robert Prechter Jr.)

  • “Stockbrokers know the price of everything but the value of nothing.” (Phillip Fisher)

  • “You can cut somebody’s hair many times, but you can only scalp him once.” (Anonymous)

  • In the business of money management, you are good if you are right six out of ten times.” (Peter Lynch)

  • “Nobody spends someone else’s money as carefully as he spends his own.” (Milton Friedman)

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Miscellaneous Essays

Why People in Need Should Be Treated Like Children

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The following is an interview that was published November 2, 2011 in The Palm Beach Letter. The subject: charity.

Ellen: In the office the other day, I heard Tom say, “Mark doesn’t believe in charity.” Is that true?

Mark: If I ever said I don’t believe in charity, I misspoke. I believe in charity. But I also believe that charity can be dangerous.

Ellen: Dangerous? How?

Mark: Charity has the potential to create dependency, destroy initiative, and promote entitlement. If you give a beggar a five-dollar bill every day for nine days, then give him one dollar on the tenth day… chances are, he’ll ask, “Where’s my other four dollars?”

Ellen: That’s pretty cynical.

Mark: I don’t think so. Cultural economists tell us that human populations tend to do what they get rewarded for doing. When you provide unwed mothers or unemployed workers or homeless people with substantial financial subsidies, you are, in effect, rewarding them for such behaviors. You are creating an ever-expanding culture of people who feel entitled to stay pregnant, jobless, and homeless – and be paid for it.

Ellen: You seem to have a dim view of human nature.

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Miscellaneous Essays

Investing and Wealth Building: Don’t Confuse Them! The Five Key Financial Strategies You Need to Create Wealth

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This essay first appeared in The Palm Beach Letter

In my ongoing effort to shock and awe you with contrarian (and sometimes counterintuitive) truths about building wealth, I give you this little nugget to chew on today:

You cannot become wealthy by investing.

Please don’t tell anyone I told you this. If any of my fellow investment newsletter publishers knew I was saying such things they would have me tarred and feathered.

The investment advisory business – and in that I include brokerages, private bankers, and insurance agents, as well as investment newspapers, magazines, newsletters, and Internet publications – is a huge, multibillion-dollar industry based on lots of hard work, clever thinking, sophisticated algorithms, and one teensy-weensy lie.

The lie is that you can grow wealthy through investing.

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