There are three ways a retail investor can make money. Yes. You heard me. Just three. No more no less.
And here at Bigfatpurse, we do not hide stuff from you. We speak the truth as it is. And the truth today is especially important because it is Christmas. (And at Christmas, you tell the truth)
So here it is: Three ways an investor can make money.
A retail investor can make money by timing the market.
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A retail investor can make money by picking stocks.
A retail investor can make money by properly allocating assets.
By timing the market we mean predicting when prices will rise, and buy before. Or predicting when prices will fall, and buy after.
Sounds easy. But in actual fact predicting where the market is headed is the toughest thing one can ever do. Tougher than flying a plane, conducting an orchestra and baking a mascarpone cheesecake at home.
To get it right once or twice is hard enough, but to make accurate predictions on a consistent basis day in day out is next to impossible. Think George Soros. He was absolutely spot on betting against the Bank of England in 1992, but where was he during the Dotcom bust in 2001 or the Lehman collapse in 2008?
An investor can also make money picking stocks. By adopting a good investing strategy that he or she sticks with through good times and bad, an investor is able to achieve respectable returns. Value Investing strategies do not call for timing the market, and yet given time they produce market beating results.
However, investing is hard work. (Speculating and punting the markets is easy though). Learning the language of finance, reading annual reports, crunching numbers, understanding businesses – they all take time and effort. Value investors spend a lifetime perfecting their craft. Think Warren Buffet and Walter Schloss.
Finally, retail investors can make money by passively allocating their assets. A good mix of different asset class reduces the volatility and produces consistent returns. Buy some bonds, commodities, stocks and keep some cash. Rebalance once in a while. When the prices of one asset class crashes, money flows into the others to compensate and your portfolio remains relatively unmolested. It requires minimum amount of time, close to zero effort and yet produces consistent return over time. Such is the beauty of the Permanent Portfolio and passive investing.
(There are other slightly more active asset allocation strategies, including varying bond maturity, differentiating between sectors and countries for stock selection etc. But it is Christmas and we shouldn’t bore you with that for now).
Yet, there is one massive drawback of a passive asset allocation strategy as compared to timing the market and picking stocks. It is boring. Absolutely boring. There is no excitement whatsoever. There is no need to read and learn anything and the prices never ever move. It is so boring that passive investors often have more fun watching their toenails grow.
Imagine you have decided to embarked on your journey to Financial Freedom today. Right now. You start at the bus terminal, hoping to catch a bus that will bring you closer to your destination. Now you have never been to Financial Freedom before, and you have no idea what bus to catch. The signboards providing bus information have all been taken down.
You try to ask the people milling around which bus brings you to Financial Freedom and everyone points you in a different direction. Some say the equity bus that is leaving now, others say wait for the gold bus that will show up soon. Yet others swear by the property bus. Catch the right bus and you might arrive at your destination with relative ease. Catching the wrong bus brings you double the distance away from the end point with hardly enough fare for another trip. Disastrous indeed. That is timing the market for you.
Conversely, you could break a sweat and start jogging. Sure it takes effort. Sure you are going to be huffing and puffing, especially if you have not exercised for a while. But for sure all that activity is good for the heart. And that is what active investing is really all about – effort and discipline.
Along the way you will meet many like minded yet different investors. Some prefer to jog along the beach while others in the park, some choose to run at night while others first thing in the morning. With many different investing strategies they all hope to arrive at destination Financial Freedom.
The biggest problem with jogging or any exercise regime is that few have the fortitude to stick with it to the end. Many overlook the effort required when they start. It is always so tempting to give up and stop the trot. And that is why so many active investors have fallen by the wayside.
Nevertheless, for those who have stopped jogging, many of them end up taking a brisk walk. They could have recognised that running and getting there fast is not their cup of tea. Some have weak hearts, others creaky joints. They prefer to leave the unpredictable bus rides and strenuous exercise to others. They want time to smell the roses, enjoy the sights and relish the journey called life. And they know that as long as they keep trudging along in the right direction, time will bring them to Destination Financial Freedom.
So Dear Retail Investor, in the hustle and bustle of the holiday season and as the New Year dawns, do take time to ask yourself, where do you stand now as an Investor and where do you want to be eventually. For that realisation will save you time and money and frustration. For that realisation may jolly turn out to be the best present you can ever give yourself.
Merry Christmas Ho Ho Ho!