Why do you invest?
It sounds like a stupid question. Because it’s only natural to presume we all have the same answer.
But you’d be very surprised to discover the truth. People have radically different goals in mind. They expect completely different outcomes from investing.
I spent a short amount of time doing internships at investment banks. In New York and Brisbane, I saw the same thing. The pros don’t manage money for profit. At least, not their clients’ profits…
Their focus was on growing assets under management. Or selling investments as if they were products for consumers. They did this by getting more new clients. Not by growing existing client’s wealth, but by advertising and marketing.
The performance of the actual investments was something so uncertain and distant that it didn’t really feature much in the business.
Admittedly, this was in 2008 and 2009. So perhaps my experiences were a bit biased. But I think the shocking thing to come out of the financial crisis is actually the lack of change in the industry.
I guess that’s what happens when almost everyone gets a bailout.
Anyway, the actual investment advice given at top investment banks was a cookie-cutter portfolio, with minimal variations for different types of people.
This sounds dodgy, right? But it’s not necessarily so…
Do you even know what you want?
Some people invest to preserve the wealth they earned. Their biggest focus is not to lose what they have.
They go to investment banks to get that “wisdom” as a service. After all, financial markets are a good place to go and lose your money, if you’re not careful.
Giving your money to someone who is incentivised based on assets under management doesn’t look so stupid if you want your assets to hold value.
Other investors are punters hoping to get rich based on their investments. They want returns, not capital preservation.
Interestingly, the two types of investor contrast in their day-to-day lives too. People on salaries can only get truly wealthy by making the right investments. That’s where their growth comes from.
Successful entrepreneurs have made their money. They face a very different challenge: keeping it. And they can lose their large amount of wealth by investing badly.
Of course, there are other reasons to invest…
First world investor problems
Some “investors” try to influence the companies they own for odd purposes. The environment and gender equality seem popular lately…
Having a company you own stocks in taken over by such people is part of the risk of participating in financial markets.
There are also plenty of investors who only plough their paycheque into stocks because the government does it for them. They don’t have a clue what they own. Nor what they’ll walk away with.
Anyway, here’s the insight I want you to figure out from all this…
Environmentalists don’t go duck hunting
You won’t find many environmentalists in a duck hunting club. Well, not the sort of environmentalist most people imagine…
My point is that investors go to different parts of the market to get what they want.
Are you looking in the right place given your own investment goals? Or are you investing in the wrong end of the market and then wondering why your results are disappointing?
Big blue chip stocks are less likely to crash in value. But they are more likely to go sideways for many years too. That’s acceptable to some investors. No good at all to others…
If you’ve made your money and worry about payouts, why punt on capital gains instead of dividends? You might never need to sell a stock again if you own the right ones paying the right dividends.
Go hunt where you have an advantage
Military history is full of generals who lured their enemies onto favourable ground. The Russians wait until their invaders have experienced a Russian winter before defrosting them with hot lead.
Tokugawa Ieyasu founded a Shogunate using selective retreat to fortified positions.
Would longbowmen have mown down French nobles if the ground wasn’t soggy at Agincourt? That field was carefully chosen…
The blindside of the hill protected British infantry from famous French artillery at Waterloo. That’s why Wellington stopped there.
What each of these strategies requires is the willingness to take some losses while falling back to where you can win.
I’m suggesting you do so too. By investing in the particular part of the market that suits you.
If you want to use the stock market to make money, that is. If you want your capital managed to grow very slowly but without too much risk, this isn’t for you.
We have a better option coming soon. One which plays the reverse – a way for Aussie investors to cut risk but add a little return to their portfolio.
But I suspect you’re reading this because you want your investments to grow, fast. You want big profits.
So, how do you get them?
You retreat to where you have an advantage.
For the past 15 years, that’s been the cryptocurrency world. For once, everyday investors were able to thrash the big institutional investors.
Avoiding government bonds for the past four years was equally important. But many institutional investors aren’t allowed to do that. They have to hold bonds because they are ranked as “low risk”. A premise that made me chuckle as bonds tanked in value far more than the stock market.
So, where should you retreat to today?
Is it foreign stocks?
That’s where many of opportunities lie. More on that soon.
Owning physical commodities in your possession has dramatically outperformed the stock market over many different time periods. And yet, they remain taboo investments. Heck, a customs officer once confiscated my gold bars because she refused to believe they could possibly be an investment.
I got a nice apology in the end.
But the gold and silver price are already up strongly…
The best option I can find right now is small-cap stocks. This sector of the market isn’t just showing signs of life. It’s giving investors great gains.
But few institutions invest their own or their client’s money in small-cap stocks. Until they become big enough, of course.
And so that’s your edge. Just as crypto eventually got absorbed into Wall Street, so too do successful small cap stocks. That’s where you should be looking for outsized gains to multiply your wealth.
Regards,
Nick Hubble,
Strategic Intelligence Australia
Comments