The best investment advice often involves the combination of the following steps: (1) acquire a specialized skill so that your labor generates meaningful money; (2) save some portion of your labor as surplus; (3) take that surplus and invest it into assets that grow in value over time; (4) maintain cash so you will never be forced to make decisions on disadvantageous terms during times when you are vulnerable; and (5) do not react stupidly to the inevitable moments when assets you own fall in value.
1. Recognize that the the value of your labor relates to your ability to acquire specialized skills that can be integrated into tasks. The harder the task, the more remunerative the reward is.
One of the most influential moments of my life occurred when I met a man who spent his life cleaning up the property after a hoarder property owner had died. He would wear something that looked like a hazmat suit and enter property that, not only was blanketed in stacked personal possessions, but would also contain animal feces and sometimes even the skeletal remains of old pets. The odor inside these properties would be described as “worse than death.”
During our conversation, I offered the usual “dealing with this stuff regularly must be terrible” trope that I expect he encounters regularly, and he responded that “That is the reason why I get paid $1,000 per day to clean it out.” It was a very mature understanding of cause and effect. Broadly speaking, that which makes a task difficult or onerous is a significant part of what deservedly results in compensation for the laborer.
This should affect how you view the obstacles and unpleasant aspects of your job. Instead of viewing them as a distraction or something that makes life more enjoyable, you should view them as that which gives value to your labor. The completion of unpleasant tasks is a meaningful component of labor’s value, and the more difficult tasks that you can complete, the more value accrues to labor. This leads to the ultimate conclusion that solving the most difficult and unpleasant problems you encounter should be embraced because your completion of them is what you makes you more valuable than anything else you or someone else could do.
2. Create a surplus between one’s earnings and one’s spending, often called “living below your means.”
Unless you have a pension or some other benefit that accrues alongside labor, it could be fairly said that a given paycheck you earn is only useful for building wealth to the extent that you are able to create some surplus from the paycheck and put it to some use, most lucratively via the ownership of a business or property.
For some, this principle comes natural. For those others, some reframing and encouragement for delaying gratification is necessary. The way I see it, when you spend a paycheck, you acquiring things that are instantly worthless but necessary at the time (say, rent paid or food consumed) or things that are of depreciating value (clothes, furniture, and nearly anything that falls under the category of personal property).
Perhaps it’s almost axiomatic, but the best investment advice is to make sure that you are saving enough money to make meaningful investments. People who invest at a rate that will lead to lifestyle improvements have a tendency to invest at least $1,000 per month, every month, with very few exceptions.
3. Develop an investment strategy and incorporate new knowledge into future decisions rather than engaging in a life of perpetual overhauls.
Most people who study investing regularly read articles and are constantly on the hunt for new points of view. Self-education is a critical component of building your own competitive advantage and maximizing the use of whatever talents you may have.
But the constant exposure to alternative methods comes with a cost–indecision or a constant changing of decisions such that no coherent investment strategy ever emerges. As the great Dr. Samuel Johnson once said in Rambler #23: “For whomever is so doubtful of his own abilities as to encourage the remarks of others, will find himself every day embarrassed with new difficulties, and will harass his mind, in vain, with the hopeless labour of uniting heterogeneous ideas, digesting independent hints, and collecting into one point the several rays of borrowed light, emitted often with contrary directions.”
In order to avoid these consequences, I recommend letting past decisions continue to accrue (i.e. continue holding stocks and other investments bought in the past and letting them produce what they may), and then incorporating additional knowledge into new decisions. Such a view avoids the frictional costs associated with constant reshuffling and wards against the possibility that the new knowledge you acquired is actually just a fad that will not reap what you intended at the time you began to sow.
Five years ago, I was really interested in purchasing shares of Chevron stock because its dividend yield was high, it had been one of the thirty best stocks in American history from 1956-2003, it was a major successor to the old Standard Oil that has been in continuous profitable operation since 1882 when you trace its progeny, and has an extremely large amount of oil and oil equivalent reserves, third only to ExxonMobil and Royal Dutch Shell among publicly traded stocks that lack a government affiliation.
In the past year or so, I have come to realize that the mega-cap tech stocks of today that sport a $100 billion balance are different from the tech stock of yesteryear because they can buy a seat at the table of an emerging industry by outright purchasing the competitor in cash. That is a difference with distinction between how America’s most valuable stocks differ from all of these in civilizations past.
The next question, becomes, what do you do with that insight? My response is that insights of the past should intermingle with the insights of the present. It is fine to own Chevron alongside Apple, Microsoft, Alphabet, Cisco, or Amazon. One gives you gobs of income and a surprising amount of capital appreciation, and the other gives you strong earnings per share growth that is funded by low reinvestment needs and strong stock repurchases. It is a perfectly fine integration of past ideas interacting with new ones. Nothing is sold, and two investments act in sync towards the goal of putting surplus to productive use.
4. Always try and stockpile some portion of cash each month.
The avoidance of bad things is an important component of success. In order to do so, it is necessary to be able to arrange your household’s finances in such a manner that you avoid punitive disruption (i.e. taking on credit card debt, selling assets out of necessity) whenever an unexpected expense arises.
For an eyeball of how much to set aside, Warren Buffett’s grandfather Ernest thought that $1,000 was prudent in 1934. Updating those figures for the modern day, that amounts to something like a $75,000-$125,000 cash net that the elder Buffett maintained during the tail end of his life.
To use a more accessible figure, I consider it wise to set aside $100-$250 per month for savings, every month, and to the extent that such funds must be used, one should aim to replace them immediately.
5. Treat asset price volatility as something that can serve you.
Since 1916, there have been eight years in the United States in which the leading market indicator of the day, be it the Dow Jones or the S&P 500, endured an annual loss of more than 30%.
For those who are slow to accept this reality, it should help to remember that the volatility of stocks and other investments is a major part of the reason why you are able to compound at 10% or whatever amount over time.
What right do you have to earn 10% instead of 2%? A portion of the answer is that being willing to see assets in your investment portfolio fall from $100,000 to $70,000 is what you are agreeing to take on for the possibility that you will have $200,000 five years later. If you cannot take that risk, you can invest in accounts where your money is guaranteed to earn 2-3%, but in a world where inflation is 3-4% over time, you will actually lose purchasing power over time, proving that the guarantee you may seek is no great thing after all.
The next level is to recognize that steep price declines are often the moment when the seeds of great fortunes are sown. Bank of America fell to a low of $3 per share in 2008 after a colossal fall from the $50s before the recession. On a given day in 2008, approximately 25 million shares of Bank of America changed hands. That means someone out there was selling 25 million shares and forever locking in a loss at a historical low, and some other entities were gobbling up those same 25 million shares available and laying down the groundwork for the deal of a lifetime.
Going on the offensive and writing checks during declines in profitability is often the marker of the successful investor, but at a minimum, the avoidance of selling assets during market declines is the condition precedent to building wealth as an investor.