Unless you are a full-time investor or otherwise possess a keen
sense for investments, it is likely that you follow the general,
solid investment advice of:
* Diversify your investments
* Invest for the long term
One cannot fault that advice, for it takes care of the two big
issues with investing:
1. Risk - which is reduced by diversifying your investments,
and
2. Time for serious growth - which the long term horizon
provides
Betting Big
Wealth oriented investors, such as Warren Buffett, however, are
of the opinion that you should put all your eggs in one basket,
and "watch that basket carefully".
Now, that may be possible for a full-time investor like Warren,
but what about the rest of us who have other things to worry
about, like our careers and perhaps a second-income business?
Is there anything that we can learn from the advice?
There is an essential truth about investing that Warren Buffett
points to, and that other wealth oriented investors have
indicated, and that is:
"In order to become seriously rich through investing, you have
to bet big".
For example, if you invest $10,000 in a single investment that
grows 10 X (i.e. multiplies in value by 10), you will have
$100,000 at the end of the stock's bull run. If you however,
spread that investment across 5 stocks at $2000 each, your
portfolio may end up looking something like:
* Investment 1 (The Star Investment) : $2000 X 10 = $20,000
* Investment 2 (Good Investment) : $2000 X 2 = $4000
* Investment 3 (Barely There) : $2000 X 1.05 = $2100
* Investment 4 (Small Loss) : $2000 X .95 = $1900
* Investment 5 (large loss/cut early) : $2000 X 0.8 = $1600
Total Value: $29,600
The difference - a whopping $81,400!
All this is assuming of course that you employ good discipline
and keep your losses small and let your winners run.
At the end of this run, you are now operating either from a base
of $100,000 or a base of $29,600. The difference is obvious and
will only compound over time. The million dollar mark is well
within the reach of the $100,000 net-worth person, while the
$29,600 person has to find several solid investments to get
there.
But hasn't the risk for the single investment person increased
dramatically?
Truth is, risk increases in proportion to the investor's level of
ignorance about an investment, as opposed to the nature of the
investment. True wealth investors are far more conservative, and
build in a far larger margin of safety into their investments
than those who invest without understanding.
"Watching the nest egg carefully" implies knowing your investment
very well - and knowing when to hold and when to fold. In such
circumstances, the single investment is not risky anymore.
Finding The Great Investments - With Help
There is help out there for finding great investments - use it.
One of the best forms of help is with expert investment
newsletters, where the editors help you find investments that are
frequently likely to double or more, and in some cases, have the
"home-run" quality of multiplying by a factor of ten.
Sure, no one is right all the time, but if you follow the careful
discipline of cutting your losses and letting your winners run,
then overall, you will be far ahead of the field. And what's
more, solid ideas will be fed to you in a steady stream on an
ongoing basis - pointing you towards one bull market after the
next - often getting you in on the ground floor.
A second fertile source is solid financial advisors. Note that
any financial advisor can put you in ordinary mutual funds
(especially into those from where they get their commission), but
it is the rare advisor (and they are out there) who will put you
into areas where your returns are much higher and which they
themselves understand very well.
Both of these sources are a short-cut to getting great investment
ideas to allow you to invest for wealth.
Maximizing Returns
Two simple concepts will help you maximize your returns through
these great investment ideas:
* Set Target Allocation for each of your investments, building
towards your target as the stock story begins to work in your
favor
* Cut your losses, and let your winners run
The first concept simply says that before you buy any stock, you
should know how much money you want to actually allocate to that
investment. Then begin purchasing shares with 25% to 50% of that
final target amount. As the stock begins to rise in value in
accordance with your expectations (this is called market
validation - and is the only validation that counts), you buy
more shares and build to your final position.
The second concept says that if a stock is not working in your
favor, cut it loose. You can always purchase it later if it seems
like the original story will eventually work out - but more than
likely, you missed something that the market is seeing. On the
flip side, when a stock is performing well, it means your story
is working out. Let it run - this is where the big money will be
made.
A final third concept that can be added to the above is:
* Sell all the way to the top
That is, as the stock doubles, and triples - begin pulling your
initial investment out, and then some of the profits, and then
some more. Once your initial investment has been recovered, you
are only playing with "house money". Continue following the stock
and on further rise, start taking some of the profits off the
table.
Of course, make sure that you have some investment in that stock
remaining as it enters its final run. This is where a lot of the
profit is actually made - but the markets are always tricky and
you may not have that final blow off. Consider yourself lucky if
you can get out of an investment within 20% of its eventual peak
(known only in hindsight). But well before your investment
reaches its final run, you should have gotten substantial profits
off of the table and into your kitty.
With this stock run complete, look for a new one, now with your
larger asset base - and repeat!
Done properly, you only need 3-4 good bull runs in different
areas of the economy to build you serious wealth!
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