Sunday, December 23, 2018

Successful wholistic investors live below their means

When you listen to investment advisors you may wonder what investment style they follow. Some seem to swear with their style and rigorously adhere to it. They may be even fanatic about it and abhor other’s disciplined way of measuring things. Some investors only invest in real estate and avoid stocks. Others invest in anything that goes up. Then you have speculators who buy assets in the hope that something will trigger a sudden price spike (up or down).

Technical analysts claim they just want to see the stock chart and don’t care what the company’s main business is about or what their balance sheet is. Then there are the value investors who pick the balance sheet of a company apart, calculate the intrinsic value of it and use PE ratios or CAPE or bookvalue or dividend rates as a way to put a value on the stock. Regardless of technical characteristics or momentum or future potential technological breakthroughs. Warren Buffett is a classic going as far as saying he only invests in businesses that he ‘understands’ and can value. Amazon anyone?

Most of us, small investors, do not have the rigor nor the inclination to look that ‘dogmatic’ at stock investing. Sometimes we don’t follow any system and just buy ‘hot tips’ often to our detriment.

I think you must know some stuff about what makes you tick as an investor before you buy anything. You do need some discipline to protect yourself. Say you like to move in and out of stocks rapidly. Then maybe adhere to a strict policy of stop losses and position sizing.
Maybe you are big on diversification and want to stay long in the market as long as possible. Still you know you are not that disciplined to ignore dramatic price falls. Just like myself, you may have a hard time deciding when you have had enough pain before you sell. Maybe it depends on the investment type? 
I have core investments that I hold for over 10 years. But there are also other very cyclical investments where I ignore stop losses because I get dizzy selling stuff too frequently and am willing to wait until approaching a cyclical peak. I buy when I think the stock is cheap and hold them through thick and thin until approaching the cycle peak.

Other times, especially when buying ETFs in stock market indexes, I may use macro-economic parameters to guide me in deciding to trim or add to a sector or country. I do not know what the future holds and these ETFs allow me to own a bit of every stock market at a very reasonable cost.

I aim for multiple income streams because I think so much in this world is interesting. I invest in real estate as if it is fixed income. I don’t invest a lot in fixed income because after tax and inflation they always seem to result in losses. I do like ‘reset rate’ preferred shares as an alternative (tax advantaged and higher cashflow than interest bearing stuff) and yes I have short term GICs in my RRSP accounts which I consider semi-cash.

I do pay a lot of attention to position sizing (max 5% of stock portfolio in anyone company). But with real estate (50% of total net worth), I have much larger positions around town and within an hour’s drive of my residence. Yet they are diversified ranging from ‘old fogies’ homes to hotel units to rental apartments to a personal residence. That way I am less dependant on the dominant industry of where I live. I also have my own business with enough liquid investments that I won’t go bankrupt when its primary business activity (Oil and Gas consulting) is doing bad.

Am I a value investor?  Probably not. Am I technical? Absolutely not, yet I may look at trends on a chart before I buy. Am I a momentum investor? Sometimes but I do tend to buy low and sell if possible high (which may take a lot of time). I do avoid hot tips and I usually know something about the company or the real estate I invest in. I do analyze the numbers but especially when investing in complex businesses such as banks, I know they are impossible to understand, and I trust (kind of) management.

I do keep track of my performance by taking my net worth and see what my annual return was, say over the last 5 years. I do not think it is useful to compare my performance to a stock market index because my performance is dependant on too many factors.  I do follow a rule of thumb trying to make around 7% annually plus inflation.  But performance is so inconsistent and often requires my personal effort – like owning real estate; running my own business or building my residence. Some years the profits go through the roof and the next I barely make anything. Rarely though, do I go down on an annual basis.

This is a much more wholistic view of investing than you see on BNN and it includes everything from career income to rental income to dividends and business performance in the mix. I think this is much more realistic than just building a stock portfolio or a fixed income portfolio and… your assets are much less ‘correlated’. Oh yes, I also own gold which I kind of consider as cash with build in chaos insurance.  Although, I haven’t seen a lot of insurance value in gold lately. During the 1980s gold temporarily peaked; then it fell and remained flat for more than a decade. In the first decade of this century gold prices went up and peaked in 2011. Next it fell more than 50% and if hasn't been doing a lot in the follow 5 to 7 years.

And most importantly: I always live below my means personally. But still, rather than being a miser, I do want to enjoy my life – pay for value only at a reasonable price. If you accumulate in your younger years when you don't yet care much about the 'finer things' then by the age that you want more luxury your investment income is large enough that the increased costs of a bit of luxury is neglectable.

Ask yourself, how do you invest and how does that work for you? The most important question is: Do you meet your goals (‘your Belize – see earlier posts) with what you currently do?  If not, what should you do differently? Probably that answer is a moving target but do your best.

You may think: Wow that is a lot to learn.  Yes and no. You do not have to learn everything at once. Especially not when you also invest in your health; you have probably a long life to learn all this stuff. Isn’t that what life is about? Learning and getting better!

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