I. Remain Long-Term Oriented
A. Envision your retirement and the time-frame required to get there
B. Be patient
C. Practice mastery over self through discipline
II. Save a portion of earnings
A. Establish automatic deposits into an investment account
B. Stash windfalls of cash (inheritance, bonus, tax refund)
C. Curb your consumerism
III. Invest in Assets
A. Research and discover great businesses
B. Diversify your assets to reduce risk
C. Invest in yourself
Pillar One: Remain Long-Term Oriented
“Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.” – Albert Einstein
The first pillar is the most difficult to master and thus the most important. Without a long term orientation the other pillars will falter. For example, if you are 30 years old and plan on retiring at 65, you have 35 years to go. Do not waste your precious time on daily news articles or claims that the “sky is falling.” We have a bias to think that “recent” news is “more valuable” information when in fact this is not the case. Media outlets and brokerages love to generate a buzz because it is good for their business; investors will check-in more frequently and trade more often, two things that hurt your performance. If you allow your long-term bubble to burst, your short-term mindset will take over and produce a plethora of mistakes.
In 35 years you should expect four market crashes. Use each as an opportunity to be more frugal and buy more stocks at a discount. If you are unsure about an individual stock holding during a market collapse, switch your holding with a market index fund during this time. This is based on the premise that individual stocks don’t always recover but markets do.
The biggest enemy of the average investor is quite often the person in the mirror! Surprisingly, investors don’t lack good ideas and insights, often times we lack the guts to see them through to fruition! We must get out of our own way and allow the power of compounding interest to work its magic. This is easier said than done, however, the investor who will produce the greatest return has a long-term oriented mindset with mastery over self. There is plenty of evidence that shows that increasing your time period of holding a stock is the best way to boost your return. Put simply: more time = more money.
Pillar Two: Save a Portion of Earnings
“Beware of little expenses. A small leak will sink a great ship.” – Benjamin Franklin
The secret sauce to successful investing is consistency. Start with a small amount of money that you can comfortably save each month. To begin, a smaller amount is actually better because the likelihood you can keep it consistent increases! Many new investors have an ambitious goal of putting away a very high percentage of their salary into investments. A better method is to find a small sum of money and set it to automatically go into your investment account on the same day/s you get paid. Most brokerages offer an automatic deposit option that is easy to set up. This way – you will reduce the amount of money that shows up on your bank statement and you will feel less inclined to spend more. If you have more easy access and availability to cash, you will spend more. If you have a bigger plate of food at a buffet, you will eat more. Do not ignore these simple yet powerful psychological triggers that impact us all.
Most people that receive a windfall of cash spend it within a few short years. It is too unrealistic to expect someone who just received a large inheritance or bonus to not spend some of it, so do your future self a favor and put 50% of it into investments and the rest is up to you. When you find yourself on a buying spree, stop before you buy and think, if someone could give me cash for this item right now, would I take the cash or the item I am about to buy? Often times, you will remember that you worked hard for your money and would prefer to keep it instead of buying a glowing “Bud Light” sign that will sit in your garage gathering dust for years.
Pillar Three: Invest in Assets
“Rich people acquire assets. The poor and middle class acquire liabilities they think are assets” – Robert Kiyosaki in Rich Dad, Poor Dad
Our simple view is that good businesses will continue to beat inflation over time. Stocks are great because you can provide management teams with your capital while you go on about your day.
Between 2002 and 2004 Google Inc. became the biggest and baddest search engine on the web. Let’s say you caught on a bit “late” and bought Alphabet Inc. (GOOGL) on January 3, 2005 and held it to June 1, 2018. Thirteen years in stock market terms is not a long time frame. During this time, Google surged over 1,100% even after experiencing a market collapse in 2008-2009. A wise investor should have seen no reason to sell Google during the collapse as the company was still growing in sales, generating very impressive operating margins, and spending less on capital to generate a free cash flow as % of sales of nearly 36%! Google was, in fact, a screaming BUY in 2009.
A well-balanced portfolio should include a blend of both domestic and international holdings. This allows for a geographic diversification which has proven to boost returns over time. In our Wide-Moat Profitable Growth portfolio, we look for growth opportunities around the globe (although most of our holdings are in the US or China).
What are most likely your two most valuable assets? Your ability to earn and your time. Therefore, invest in your own talents and abilities and do not waste any effort trying to time the market. Focus on educating yourself, take advantage of investing resources, and allocate your hard-earned dollars in assets not liabilities.
The closer you follow these three simple pillars, the easier you will achieve investing success and financial independence.