If you’re in Colorado, tune your dial to KRYD FM tomorrow morning (that’s May 22) @ 7.15 am when 7 Millionaires … In Training! hits the airwaves!!
If you listen in, you’ll find out that I have a face for radio and a voice to match … c’est la vie …
Take note that I said OR … I didn’t say AND …
In fact, most financial writers/bloggers/commentators take it as a ‘given’ that you will do exactly that: save a certain % of your salary and plonk it into your 401k to get the company match and have it invested in the restricted group of managed funds offered by your employer and/or 401k provider.
They’ll recommend that you dollar-cost-average your way into, say, a low-cost Index fund … and, you’ll be surprised to know that I agree and so does Warren Buffett:
What advice would you give to someone who is not a professional investor? Where should they put their money?
Well, if they’re not going to be an active investor – and very few should try to do that – then they should just stay with index funds. Any low-cost index fund. And they should buy it over time. They’re not going to be able to pick the right price and the right time. What they want to do is avoid the wrong price and wrong stock. You just make sure you own a piece of American business, and you don’t buy all at one time.
Now, I agree that this is indeed an elegant and simple long-term SAVING strategy for the Average Joe who thinks that they can save their way to wealth … $1 million by 65 … whoohoo!
But, if you want more (and, you probably should), then you have to move to Part B i.e. get “in the business of investing” …
That usually means one – or, for the rare genius, a combination of – four things:
1. Get in the business of running a business (that’s what Warren Buffett does … contrary to popular belief, he is primarily a business owner … he owns or controls 76 major businesses!)
2. Get in the business of learning about and selecting a FEW individual stocks (that’s what Warren Buffett does … he owns / has owned stock in Coca Cola, Kraft and many others)
3. Get in the business of learning about and actively investing in real-estate (that’s what the rehabbers, flippers, foreclosure experts, etc. do)
4. Get in the business of climbing/clawing/backstabbing your way to the very top of the corporate ladder (that’s what America’s Fortune 500 CEO’s do)
Usually, it means choosing just ONE of these as your main Making Money 201 path to income – at least, that’s what I did – then choosing a SAVING strategy to convert that income to passive assets to keep your wealth growing and fund your eventual retirement:
I was in a corporate job for nearly 10 years … after about 6 years, even though I was doing ‘very well’ (for my age, position, seniority, etc.) I realized that Option 4. wasn’t for me – I would never become a CEO of somebody else’s company.
I didn’t know much at all about either 2. or 3. but I did have a sudden urge for Option 1. – so that’s what I chose!
My first business was a bit of a ‘sleeper’ – it started its life as a very small (and new … I joined one year after inception) family business and grew fairly slowly. Because it was barely breaking even, I bought the family out and managed to get it to grow rapidly and substantially. I still keep it 15 years later, although, it has run very well without me for a number of years now.
I used the profits from that business (the nice little cash-cow that I turned it into) to fund a few start-ups, most of which I subsequently sold.
But, when all of these business were running, I SAVED a good proportion of the profits in various ‘savings’ vehicles: mainly real-estate and a little (at that time) in stocks … none in funds.
Why do I say ‘saved’?
Because I didn’t ‘actively invest’ in them … I wasn’t in the business of investing … I was simply in the habit of saving. I happened to select a non-standard mix of savings vehicles to put my money into (e.g. real-estate and stocks, rather than CD’s and Funds) … then I held on to them … and let time (and the markets) take care of the rest. Because I could put so much in, I eventually got so much out.
It was a Making Money 101 strategy.
My % returns from the businesses were spectacular … my % returns from my ‘savings’ were ordinary … yet, each played a critical part in my current financial success. Interestingly, my overall $ returns from both were excellent!
In the last few years, as I geared up for my ‘retirement’, I have revisited these options and moved away from business and to investing … because I gave myself so much exposure to both real-estate and stocks over the years, I have built up the skills in both to allow me (for some time, now) to actively (as well as passively) invest in both as a Making Money 301 wealth protection strategy.
But, if you want to become financially free, at a relatively young age, with a relatively decent passive income (you’ll have to plug in your own numbers), then you will need to find one of these four options that interests you, and hope that it delivers spectacular returns for you …
… for most people, Warren Buffet and I also agree that it’s unlikely that it will be in stocks, at least according to this little exerpt as reported by Soul Shelter (whose brother, Charles, attends Berkshire Hathaway events in Omaha each year) who relayed this anecdote from Buffett’s 2006 shareholders’ meeting”:
One shareholder asked a question along the lines of ‘how should I study investing in order to build wealth in my spare time?’
Buffett replied that, for most people, the bulk of their income is going to come from earning power in their chosen profession. Therefore, from the standpoint of building wealth, free time is better spent sharpening one’s professional skills rather than studying investing.
This statement applies directly to my Option 4.; it equally applies with a little modification to any of the other options (e.g. Option 1: … for some people, the bulk of their income is going to come from earning power in their chosen business. Therefore, from the standpoint of building wealth, free time is better spent sharpening one’s business skills rather than studying investing).
In other words, select where you will make your money, and focus all of your energy, research, and attention into that … focus!
Of course, if you’ve decided that your financial future lies in the business of investing then here’s what you should do:
Do not as Warren says … do as Warren does!
PS We were featured in the Q&A for the latest Carnival of Finance; visit it here: http://moneyandvalues.blogspot.com/2008/05/carnival-of-personal-finance-153-q.html
I’m not sure there’s much difference between option 2 and being a speculator/trader. Most people aren’t going to beat the stock indices doing this on a risk adjusted basis. As I said yesterday, you’ve got to ask yourself: “do I have an “edge” that can beat the market” and if you do can it earn enough in above market returns to make your time invested worthwhile. If you only earn 1% above the market and only have $100,000 to invest it’s not worth spending much time on investing except in order to learn to be better.
It might make sense for someone with say $100-200k at least to invest to build a portfolio of just individual stocks they like. On the other hand ETFs/index funds in the US have very low management costs and so it might not make much sense unless they have an edge of some sort or just enjoy owning these different companies and their “stories”.
Another option is to select good managers. But that might be as tough for most people to determine as selecting good stocks.
My comments yesterday were that there are ways to earn equity like returns with lower volatility without trading (except rebalancing) or much in the way of security selection. You need to include lots of asset classes and use cheap leverage (mortgages and levered funds like SSO) where possible so that you can get an equity like return while including some stuff in your portfolio that earns less than equities (like bonds).
Personally, I’m in the habit of saving. I’ve got a plan to start a side business a few years down the road. But nothing ready for prime time. I have a lot to learn about business between now and then.
I just had an epiphany this week-end about this. I just realized that I will be better off trying to make more money than trying to cut my expenses to bare bone to build wealth.
I will still save sensibly but I will focus more in make money from my trading.
@ Moom – I wrote a long comment that I just deleted and will put into a f/u post, because the points that you raise are important! In the meantime, though I wouldn’t waste my time chasing market returns (8%) … if you are going to, adding JUST ONE POINT (i.e. 9%) INCREASES the return on $100k over 20 years by $83k – sounds worth it to me! Now, imagine what a 15% return will do …
… actually, no need: 15% INCREASES your return by ALMOST $1 Mill. !!
@ Q – … and, Q knows exactly where he sits. 🙂 BTW: What do you hope to gain from this blog?
@ NotWorried – A fantastic epiphany to have … and, it goes to the heart of my future response to Moom: forget chasing fund managers; the market; whatever … do what Warren Buffett suggests: concentrate on improving your skills, because THEY will make you the most money (which you can then worry about either SAVING or INVESTING … forget anything else). Read this:
I’m more of #2, and it was the best move I ever made!
@ AJC At this current moment I don’t think I have a strict agenda for what I’m looking for from your blog. I found my way here from other blog links, and I like your point of view.
@ M/Monk – Would love to hear how; this blog is yours! Or, just post a link … 🙂
Q – Great to have you! Just making sure that I am appealing to a wide-enough audience while staying true to my message (and myself!) 🙂
For the most part I agree with you. Big execs like Buffet and others have followed, more or less, your four-point outline. But the real key is not to invest for profit, but to invest for value. One of the main reasons Buffet was successful was because he turned down so many seemingly “winning” opportunities to invest in the long-term benefits of his 70+ companies which we see today.
Saving is an undeniably safe strategy, but many people make the mistake of thinking they NEED to invest in some company to guarantee their financial future. Sure the overall idea makes sense, Buffet would tell you that himself, but when HE says it he means investing in value. Lots of people have tried to do this and almost none have come close to his success…that just speaks to the rare talent of Buffet to look in the right place at the right time. (keyword look)
Once again I agree with you in that rule #1 is the key. But it’s not necessarily being in the business of running a business but more the business of identifying WELL-RUN businesses. This is what Buffet has done and will continue to do. Once you master this, it becomes obvious which companies one should invest in.
I actually wrote a blog the otherday about the idea of a “coffee thought.”(http://onecoffeethought.wordpress.com)
This refers to those amazing, one of a kind ideas which you find yourself having from time to time. Believe it or not, this occurence actually relates to how the brain works, and can help business owners start out (as you were trying to do with your family) or help them find what works.
Overall bravo for outlining everything so clearly and I look forward to reading more of your posts.
@ Coffee – make mine a strong espresso!! Thanks! 🙂
This is my new favorite personal finance blog, and posts like this are the reason why.
@ BW – Thanks! Have you checked out my new site 7m7y.com … I’m looking for 7 people with open minds to become my 7 Millionaires … In Training!
It’s a form of ‘social experiment’ – and, a way for me to ‘give back’ – to prove that there is no secret to how to make money.
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Hey AJC your site is great! So was the [link removed] one….nice outlook lol.
@ Jack – nope, that site wasn’t mine … thanks for stopping by! 🙂