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Work hard and hand the excess over to your broker seems to be the common trend with most passive investors. The truth is most investors are in fact “passive”. Meaning most people out there are too busy earning a living to truly become an educated investor.
I’ve been hosting a financial radio program for close to 7 years and the common theme I hear from those I meet with is “What’s the magic bullet?”, “What’s the secret ingredient?” Meaning, they want to know what is the end all be all, the greatest one investment or asset class that will generate an above average return that is risk free and fully liquid.
My answer is always the same… I can only tell you from my experience and years of research what investments you should NOT rely heavily on. The talking heads and self proclaimed gurus on television lead all passive investors to believe that the equities market is the only path to prosperity. They all tell you to Invest in stocks, bonds and mutual funds and over time you will out pace inflation. They all go so far as to actually predict what your overall rate of return should be year over year.
This is high risk investing regardless of how conservative of an equities portfolio your broker may lead you to believe you have. The reality is most investors do not truly understand how or why markets move. Most solely rely on their broker or money manager to determine when is the right time to rebalance, buy or sell any one holding or all holdings within a portfolio. All the while, the brokers themselves are not invested in that model that they are preaching.
Please understand, I’m not telling anyone to exit the equities market never to return. I’m simply suggesting that investing in multiple buckets of the same asset class is not true diversification and its certainly not what the uber rich invest in. True diversification is certainly not the direct path to wealth but it certainly paves the way for a smoother ride and in turn helps you reach your financial goals faster and with much less sleepless nights.
So what’s true diversification in my opinion? What’s the philosophy that I follow that makes so much more sense, that allows me to have more control over my financial destiny? The answer is investing in opportunities within market cycles and finding these opportunities that pass the logic test. For example: My core focus at this time of uncertainty is commercial real estate acquisition. To be more specific, I focus on value-add opportunities where lenders have foreclosed on assets due to previous investors becoming overzealous, over leveraging or simply veering away from their core competency.
This was created by “The Black Swan Theory”. The idea that America has risen to dominance and prices of land and anything tangible will not lose any significant value. Even the most seasoned investors subscribed to this idea and didn’t have the financial aptitude to understand how money moves. Most real estate investors I have met understand the asset classes that they invest in, most understand how to keep a tenant happy, how to squeeze as many dollars out of an apartment unit or retail unit as possible. Most even have a solid foot hold on why an asset may be under valued. What most real estate investors and other investors for that matter lack is how money moves and how money works. As I said before, most seasoned real estate investors understand real estate, but that doesn’t mean they understand the concept of money.
America has a unique financial system. we live within a Fiat system, meaning nothing backs up our dollar. This is very different from most currency within the global economy. The fact that nothing backs up our dollar any longer since Nixon, we have an artificial or synthetic financial system. This allows us to make up rules as we go. From keeping our reference rates compressed to leveraging our currency over and over again with the same GDP output. All the while selling the same line of BS to other countries at the bond auctions. For this reason and this reason alone, we continue to buy back our own debt.
Because the US dollar is nothing but a big fat IOU from what is always touted as the strongest, “flush with cash and opportunity” country on the planet, we as Americans, continue to go on with our lives investing in the same asset class(equities) and continue doing what we always did because we are satisfied getting what we always gotten and frankly we are brainwashed and programmed to believe if we continue to invest in American companies, we will continue a 8-9 percent year over year return.
Call me a conspiracy theorist but why would the government want anyone to do anything different? Work hard and hand the excess over to your broker who in turn invests the very same companies that will keep job retention stabilized and stimulate the economy. The problem is, the government underestimated the very rich and the mammoth corporations that used the tax code to their advantage. It’s my belief that before Warren Buffet became who we know him today, he began investing in an age where American corporations had all jobs on U.S. soil, where officers of the company owned the majority of the common stock. They had a true vested interest in keeping the company growing.
Aside from oversees jobs affecting U.S. job growth, today corporations focus on what will appease and satisfy the stock holders. Even if that means hurting the company in the long run. So long as the numbers look better next quarter than they did this quarter, the powers that be have done their job. It’s like a professional body builder that goes the natural route and steps on stage and places in the top 10, then does a cycle of steroids before the next contest and places higher. Then doubles the dosage for the next competition and wins again. Body building fans expect that competitor to look better show after show. So, to appease the fans and to earn money and accolades, he puts his long term health aside to look like the perfect human specimen and beat the competition regardless of repercussions down the road.
This analogy is how todays publicly traded companies are operating. It’s instant gratification or what we all know as the greed factor. No one knows it better than the American spirit. It’s what made us a powerhouse of the planet and was also the main culprit of a global financial Armageddon.
With all of the warning signs and everything 2008 should have taught us as investors and the U.S. government, we continue to over leverage our asset. Whether it be buying equities on margin, refinancing a piece of real estate, 100% loan to value or borrowing against our GDP 150% LTV, this vicious cycle has no sign of ending. It’s basic macro economics. Capitalists, opportunists, and those that educate themselves on how money really works and what money truly is will will prosper now and throughout the end of time. It’s the one thing I’m certain of. Those that choose to continue to work hard and and hand the excess over to their broker and stay the conventional tunnel visioned path of investing will surely be left behind. The gap between the “haves” and the “have nots” will spread beyond repair. This will cause the the U.S. to become a 2nd rate financial power. We are almost there. A few more rounds of quantitative easing should do the trick.
The moral of my rant is that it’s never the investment, its always the investor. Take the time to invest logically. My grandfather taught me a valuable lesson at the age of 7. He said, “if you don’t understand something your about to sign, THEN DONT SIGN IT”. He went on to say, “if you lay awake at night thinking about an investment you made, then you shouldn’t have made it”. If only the average investor would subscribe to this priceless wisdom! It’s truly a double edged sword… it’s those that educate themselves as to how money works that realize when an opportunity presents itself. The reality is, those that educate themselves, end up making money at the expense of those that don’t.
In the last five transactions I’ve been involved in and put together, my partners have made substantial profits. Though the assets we seek out tend to be value add projects and carry a high degree of risk, and past projects will never be indicative of future deals, we truly feel we have a formula that we will not veer away from. We invest on “what is” and never buy based on “What will be”! This is truly what I mean when I refer to logical investing and not frenzy investing or “emotional driven investing”. This, alas, is the standard dogma. And sadder than that, we must have these thinkers to create the market for us.