It’s 2021 and you have $10 million in cash. You sold your business, you sold real estate, you inherited the money – it doesn’t matter. You only have $10 million in cash. You think you’re rich, but you’re probably not.
You did not devote your life to investing and financial markets, so you are having a hard time deciding what to do with the money. Besides, things are not as simple in investing as they used to be.
Parking it in the bank would mean you would earn near-zero in interest, and you can’t exactly live off 0% a year – not to mention that inflation is eroding your purchasing power, year in year out.
Fixed income instruments also offer modest returns and you are wary of them because they have rallied tremendously in past years due to ultra accomodative monetary policies by central banks.
You have considered getting into property, but rental yields are also squeezed now for the same reasons that bonds are. You made your calculations and you realised that everyone gets paid except you. The taxman, the agents and the property managers – they all get paid, while you are left with a measly 3%. You decide that 3% is not enough reward for the risks that you are taking.
You consider the “stock market” to be way overpriced and too risky to invest in – so you sit there with your $10 million, and you don’t even start to look for something to invest in. You tell yourself that you will wait for a price drop and then you will buy. Sure enough, a big enough drop comes a few months later – but you did not prepare well enough to be ready to allocate capital when everyone else is running for the hills. In fact, you were scared too.
You tell yourself that you will wait for the economy to get better because “now is not the time to invest”, but by the time the economy looks better, your favourite companies are up 100%. You decide not to buy because “it’s too late now”.
At some point, a friend of yours shares an investment idea with you – it is to buy the shares of a good company with solid growth prospects at a reasonable price. You decide to invest a considerable amount of money because your investor-friend made a lot of money from investments in the past and you trust his judgment. A few weeks after you make the investment the stock market starts selling off taking your shares down with it. You are down 25% in no time and you start to second guess the investment and your friend.
After some soul searching, you decide to hold on. Unfortunately the stock market continues to drop and you are down another 15% – you can’t take the pain anymore and you decide to sell and never look back.
You take the loss and tell yourself that you will recover. You go back to your comfortable lifestyle knowing that you still have north of $9 million in the bank – you have all the time in the world to waste.
A year later, as you are enjoying a drink with a friend he announces to you that he invested in the shares of So and So Group at $70 a share and that he can’t wait to make a lot of money from it. After trying to hide your visible shock from him you tell yourself that the shares of SNS can’t be at $70, you sold them at $30 not more than a year ago.
You check the price chart of SNS and indeed the shares are at $70 a share, actually you sold all your shares a day before the all time low. You make your calculations and realise that you lost $400,000 when you would have been making $400,000 if you just held on! The numbers make you dizzy.
Making money in financial markets is not easy – you need to go through an apprenticeship to acquire the experience, skill and confidence required to succeed. Having just capital is not enough.
For the purposes of this letter, I will distinguish between two polar absolutes within financial markets and investing: 1) Having Money without Skill and 2) Having Skill.
|Money without Skill||Money with Skill|
|Methodless||Methodical and Strategic|
|Fearful||Balanced and Patient|
|Fear of Missing Out (FOMO)||Long-Term Oriented|
|Impatient||Tireless and not Cycle Specific|
|Short-Term Oriented||Multi-Generational Wisdom|
|Dangerous & Fragile||Robust|
|Cycle of Specific||Intelligent Risk Taking|
|Afraid of Volatility||Uses Volatility|
|Focuses on Knowing||Focuses on Doing|
Money without Skill is:
Money without skill looks for sure things and does not have the capacity for intelligent risk taking. It tries to know everything before doing, while the former is impossible. Money without skill is impatient and focuses on short-term results as a measuring stick. Immediacy is the name of the game. Money without skill is never the first mover – it needs the whole market backing it before investing. It is not logical or rational, it is purely emotion driven. Money without skill tries to pick peaks and bottoms all the time because that is the only way it knows how to make money. It uses borrowed conviction but it can’t ride an investment long enough to reap significant returns.
Money with Skill is:
Money with skill accepts that you can’t know everything and focuses on allocating capital accordingly. It focuses on the doing, rather than the knowing. It understands that compounding capital over time is what matters, not “knowing”. Money with skill takes risk intelligently. It is patient and focuses on a company’s progress rather than day-to-day movements and price charts. It has the wisdom and expertise to use the mistakes and handicaps of others to earn super sized returns.
Investing is Alchemy
Earning above average returns in investing is an art form. It takes years of hard work to develop it. You have to try, fail, try again and focus all your energies into developing your method. Capitalism and markets do not exist to serve you and somehow give you above average returns just because you want to make money.
Make sure to not conflate a bull market for brains or wisdom. Each percentage point of above average return that you earn should come from a proportional amount of above average hard work.
If you somehow find yourself making big money without offering something proportionally big or unique to the markets, prepare for a reversal of your fortunes.
“I start early and I stay late, day after day, year after year. It took me 17 years and 114 days to become an overnight success.”