Investing: Simple > Complex
There is no one machine, program, or algorithm out there that has successfully and consistently predicted and beat the market.
This is because stock prices are mostly random and unpredictable. Sure, some analysts get lucky some of the time, but for the most part, most advisors fail most of the time.
The market is highly tricky to time. Just ask 92.2% of financial advisors and fund managers out there who consistently fail to beat the S&P – complex analytical tools and all. Think about it. If someone had cracked the code, wouldn’t they be trillionaires?
So why is an industry with a 92.2% fail rate always touting their complex analytical tools, trading algorithms, and an army of analysts?
Because they want you to feel like you couldn’t possibly do it on your own, you need their fancy algorithms and complex strategies. If they make you feel like you need financial advisors and hedge funds and mutual fund managers, that means money moves from your pockets to theirs.
The financial services industry knows this one simple fact. The retail investor has very little success on their own.
According to a recent study, the average annual return earned by a retail investor for the 20 years between 1999 and 2018 was 1.9% – a -.3% return when accounting for inflation. The professionals know that if you try to go it alone, you’re more likely than not to lose money and go running back to them.
Since very few retail investors are successful on their own, the financial services industry has touted their trading prowess with fancy-sounding strategies.
Many financial advisors incorporate options and trading strategies like the following:
- Covered Call
- Married Put
- Bull Call Spread
- Bear Put Spread
- Protective Collar
- Long Straddle
- Long Strangle
- Long Call Butterfly Spread
- Iron Condor
- Iron Butterfly
- The Pullback Strategy
- Trading the Range
- Fundamental Trading Strategy
- Buyer and Seller Interest
- Breakout Trading
- Counter-Trend Trading
Not to be outdone, hedge funds have their own set of strategies:
- Long/Short Equity
- Market Neutral
- Convertible Arbitrage
- Distressed Investing
- Emerging Markets
- Special Situation
- Long-Only Equity
- Short-Only Equity
- Fixed-Income Arbitrage
- Global Macro
- Risk Arbitrage
Last but not least, there are mutual fund strategies:
- Top-down investing.
- Bottom-up investing.
- Fundamental analysis.
- Technical analysis.
- Contrarian investing.
- Dividend investing.
There’s no way you could execute any of these strategies on your own. You need the help of investment professionals, right?
Despite all these fancy names, the truth is most of these strategies are just smoke and mirrors. Most of them fail to produce any market-beating returns to their investors.
You’re better off putting your money in an index fund than placing your money with 92.2% of the financial advisors, hedge funds, and mutual funds out there.
There’s a class of investors that don’t fall for any of Wall Street’s tricks. They see past all the hype.
Keeping it simple has not only worked for them but has afforded them the wealth and financial freedom most people can only dream about.
These ultra-high-net-worth investors ($30 million or more of net worth) (UHNWI) have very few simple rules for investing:
Look beyond Wall Street to tangible assets –
UHNWIs look to investments backed by real assets because tangible assets are built to withstand market volatility. Investments like secured lending, a productive business, commercial real estate investing, commodities, agricultural products, and energy all fit the bill.
And for investing in these tangible assets, the UHNWIs look to the private markets through direct investments or indirect investments through private funds, real estate syndication, or private debt and equity to avoid Wall Street uncertainty.
Invest in something you know –
Before investing, make sure you fully understand how the underlying business or investment operates, how it makes money and the future sustainability of the business model and profitability.
Don’t invest in anything you don’t understand. You’re less likely to be taken advantage of by unscrupulous sponsors.
Don’t let somebody else control your money –
This is not to say that you shouldn’t ever invest your money indirectly. This speaks more to having control over how your money is used.
This comes from proper due diligence. Don’t blindly give your money to strangers. Know the experience of the managers handling your funds, understand their business, and know exactly how your money is going to be used.
Don’t limit yourself to your backyard –
To find ground-floor and off-market opportunities with high upside, you’ll need to look beyond your backyard. If you don’t, you may miss out on high growth emerging markets that offer more upside potential than more mature and saturated markets like the gateway markets in the U.S.
Cash flow is king –
An investment that generates passive income allows you to make money in your sleep and will eventually allow you to step away from your day job to pursue your true passions.
Without passive income, you will always be trading time for money, and that time will eventually run out as your body wears down. Passive income allows you to generate income even beyond the grave for your heirs.
Have a savings strategy and avoid keeping up with the Joneses –
Save more and spend less sounds simple, but it’s easier said than done.
In today’s social media society and the pressures to keep up with the Joneses, it’s harder and harder for Americans to save and reduce expenses. But, if they can, they can allocate more and more of their investment capital towards passive income, generating tangible assets across multiple markets to build diversified, recession-resistant wealth shielded from Wall Street volatility.
To not lose money and, more importantly, to make money, you don’t need Wall Street professionals and their complex investment strategies.
Just remember some basic simple rules, rules that have made UHNWIs who they are – financially independent:
- Keep investing simple.
- Invest in easy to understand assets.
- Understand the business and how it makes and sustain profits.
- Look for passive income opportunities, and don’t be afraid to look beyond your backyard.
- Save more and spend less.
Sticking to these simple rules is the key to generating wealth and to one day stick it to the man and walk away from your day job on your terms.
Michael Foley, president and CEO of Humabilt Capital, oversees the entitlement process, funding, and operations for Humabuilt Capital. Mr. Foley has been a full-time real estate investor since 1995 during which time he has developed hundreds of single-family homes, townhomes, condominiums, and apartments. Mr. Foley started his investment ventures in Long Beach, California, and has expanded to Apex and Durham North Carolina. Mr. Foley is a graduate of the University of California at San Diego.