Reaction By Brad Thomason, CPA
I have a friend who makes money flipping houses. Given that our firm provides services to various kinds of real estate investors, this probably doesn’t strike you as a very shocking revelation.
The thing about this guy though is not that he flips houses, but where he got the money to flip houses. He didn’t have any capital to speak of when he got out of college. About 3 years later, he had socked away maybe a couple million (I don’t know the exact amount…). That would have been around 2001 or 2002. He made his money trading tech stocks during the Y2K era.
Since that time he has made money buying discounted mortgages. And lending money to small business owners. And I think he owned a stake in a publishing company at one point. And sometime in the early days of e-cigarettes he did something with that, too. He also still trades a bit, but only for a few minutes right at the open and close of the market, since that’s when the most volatility usually occurs. At least he did a couple of years ago when I last visited him at his office.
Point is, this guy has made money doing a lot of different things in the investment space. He is what I think of as the ultimate example of a “deal guy.” He’s always looking for opportunities, and although he doesn’t apply the same sort of overarching sense of strategy that I tend to favor, the results are undeniable. He has developed a way of operating which is a good fit for his personality, and also happens to be a good fit for the personality of the investment markets.
He never tries to make the market what he wants it to be. He just looks at it – as it is – and reacts accordingly. If the thing that used to work isn’t working anymore, he stops doing it.
This is so fundamental as to be one of those things you hesitate to even point out. But fundamental or not, we see smart investors ignoring this principle over and over again.
Has he made money with everything he’s ever tried? He hasn’t. Is there something to be said for sticking to what you know? There is. But neither of those is more persuasive than the basic point: we can’t bend the markets to our will. When we try, we lose.
If you bought bonds because you want interest rates to be higher and know that they were higher in the past, it will not increase your yield next year by a single basis point. If you commit to a 1% CD, while wishing that it would pay you 8%, how do you think that’s going to settle out? If the stock market had big gains in a previous year, how can you reasonably expect the same thing next year; especially given that the market hasn’t returned the same thing 2 years in a row in the modern era?
My friend probably has a list of wants, too. But to my knowledge, the vast majority of his decisions have been based on what is, not on what could be. I have watched him on more than one occasion get well into the analysis on something that looked promising at the start, but withered under closer scrutiny. So he punched out. These episodes have cost him both time and money. But even in the midst of frustration, he’s been much more likely to take the small loss in order to avoid the big one; and keep his powder dry until more actionable opportunities come along.
How about you? When you look back at your investing history, have you been a reactor, or a wisher? My friend is still living off of a windfall he made over a decade ago. I wouldn’t be surprised if he’s worth more today than he was back then, even adjusting for the fact that he pays for a pretty nice lifestyle out his portfolio earnings.
If you aren’t getting that kind of results, the answer may be very simple. Instead of trying to invest on the basis of what you wish the markets were like, do it on the basis of what you actually find them to be.