I have traveled all over the world and have been able to meet some of the most intelligent and provocative people in the investment arena and beyond. He is skeptical of promises, predictions and so-called guarantees that can sway individual investors into decisions that are not appropriate for their particular circumstances.
The Emotional Controls
Safe and successful are two words that should never be separated when considering how to invest your money. You will be able to understand how to make successful as well as safe choices by following these four key investment strategies:.
Knowing the Difference between Market Stats and Market Hype
Hedging Wall Street: Hedged Portfolio Construction
Planning for the Future and Seeking the End Game
John Mauldin, of Millennium Wave Investing, author of the best-selling books Bull's Eye Investing and Just One Thing. Special thanks to my wonderful wife, Theresa, and the three very best children in the world.
ROCKING WALL ST
Part One
THE EMOTIONAL CONTROLS
These first two chapters will have a distinctly personal twist: the real story, "About the Author," to provide an emotional background for the more technical discussions that will follow. By creating slightly altered rules (by declaring that he would not be fiscally responsible for generations of unborn children—the children of his grandchildren) he had accumulated enough financial firepower at this point in the wealth-building process to not have to play the game anymore. . . Is government paper outside the United States intrinsically safer and/or worth more than American securities? The short answer is: not for my money.
If there is a speculative bubble, you want to be sure that you are participating in. the final blowout phase.
Part Two
KNOWING THE DIFFERENCE
BETWEEN MARKET STATS AND
MARKET HYPE
You can still buy a 4,000-square-foot, five-bedroom modern house in the beautiful rolling, wooded hills near Pittsford, New York, where I spent some time in the summer months, about 20 minutes from the city of Rochester, for about $400,000. The rest of the area's smaller companies, and its burgeoning technology sector, couldn't pick up the slack. People saw Miami as a glamorous city and rushed in to buy "before the land ran out," only to suffer the crash of the 1930s.
In the 1960s, Miami and many other parts of Florida exploded during the "condo boom." But that boom, which took place in the early 1970s, came to an end as condominiums flooded every market in every city in the state. Caution suggests that even real estate markets that meet these criteria will see long periods of underperformance relative to equity markets, and that both asset classes will spend a lot of time on the dark side of the moon. Stocks will outperform real estate for most decades, if the past 100 years are any indication.
A family office is an office that focuses on the investments of a multi-generational family: a family that has enough money to invest for themselves, their children and their grandchildren. Therefore, a family office would generally manage at least $100 million in assets for it to be worth it. At an absolute return conference in Bermuda in April 2000, I met the chief counsel of a family office.
Kyle had invested money in the stock market through his 401(k) plan and his wife's IRAs. He assured her that he followed the companies almost every day and constantly received research papers in the mail. And somehow, without quite realizing how it happened, he was waist deep in the fallout.
Whether or not I will be the hero of my life, I don't know yet." He began to think that he might die a failure. The conclusion his instincts were now telling him was: Never invest in the market again. The only two ways to win seem to be either investing in a diversified way in a secular bear market trend for 10 to 20 years, or playing the game "the right way". (More on this in the next section.).
For everyone else—those who think they might be able to beat the system over time—the rule of parallel investment universes seems to apply. At the end of the day, the market is the only one that seems to be winning. However, when they see investors taking a more diversified and cautious approach, and when they see those same investors bow in fear before the market deities protecting every bet they take, then even though the gods may make these investors squirm at first—perhaps from having them break even when the market makes 20 percent in six months, just to test their resolve—the gods eventually respect the tenacity and quiet courage of these investors.
Part Three
HEDGING
WALL STREET
HEDGED PORTFOLIO CONSTRUCTION
Calculate your remaining liquid net worth, and invest it
Let's say you have $100,000 of liquid capital left over that it doesn't look like you'll need for the next few years. As your assets grow, sometimes even the smallest change in your portfolio can lead to a big dollar move up or down. That's why early in my investing career I learned to think in percentages, not dollar bills.
For example, if you have a portfolio worth $10 million and it drops in value by 1 percent, you may panic at the thought that you just lost $100,000. Or if you invest $2 million (20 percent of your assets) in a conservatively hedged fund of funds with 20 managers, you may initially feel that putting $2 million into one investment is too risky. But if you break it down and realize that 20 percent of your wealth is invested in a conservatively hedged format, where the average allocation to each manager equals 1 percent of your personal net worth, you can come to a different, more reassuring conclusion. .
Evaluating these things by thinking in dollar bills is a much more difficult and often misleading task.
FOR FUTURE MILLIONAIRES—
- S. Indexes
After all, didn't your friend's great-grandfather invest in a few stocks in the 1940s, buy and hold them in bear markets, and become a multi-millionaire. Or, in the 1930s, many of the companies backing the corporate bond sector that your broker will be offering failed. What may have worked in the 2000-2002 bear market is unlikely to work in the next bear market.
Gold, oil, bonds, Asia, nanotechnology, biotechnology, all may or may not be successful in the next decade. They are not the Rolls-Royce we are looking for in the risk/reward spectrum of high net worth investments. Sectors like energy, biotechnology, technology, real estate investment trusts (REITs), and precious metals have all had their day in the sun.
The joker in the card game is the chance that a rebel faction will take over the government and decide that all business is now government property. I've researched as many mutual fund managers and private brokers that have consistently beaten the S&P over the years and found no compelling reason why they should continue to do so going forward. If a multi-year, dollar-cost, multi-year investment plan can stay true to the plan even through the worst of times, the chances of profit are high.
FOR MILLIONAIRES WHO DO NOT WISH TO BECOME EX-MILLIONAIRES
But market direction will not be a key indicator or driver of growth. In 2004 and 2005, years when hedge funds generally did not perform at optimal levels, funds of funds took much of the blame in the alternative financial press. The ability to sometimes enter funds that are closed to new investors due to the funds' reputation, institutional referrals or personal relationships developed within the organization.
You would be ignoring too many of the types of funds that are unrelated to the market or to each other—investments that borrow money, invest in real estate, and so on. Then your responsibility only needs to be to focus on your research and due diligence of the funds of funds, their tax consequences and their performance. There are times when aligning 5 to 20 percent of your portfolio with the direction of the stock market may be a wise consideration as a multi-year investment.
What first led you to the idea of investing in hedge funds and funds of funds. The other important reason that I think an investor should not invest in single hedge funds alone is because of the huge expenses of thorough professional due diligence. Also in the documents should be the names of the lawyer and accountants and/or auditors of the firm.
Part Four
PLANNING FOR THE FUTURE
Rebuilding Phase
In years where you fail to meet the goal in step 1, the new goal would be to make up the shortfall in future years by reducing your consumption and need for material items, increasing family income by working more, etc.
Growth Phase
Once your ability as a craftsman has allowed the art of your life to take center stage, you are at the Game Beyond the End Game. The Game Beyond the End Game focuses on what brings you joy, not just the highest number of dollars. Once the Game Beyond the End Game is defined as such, we find that this new shift in thinking gives us a more profound and joyful life experience, win or lose.
He went to his son and asked, "Do you want to go to the circus today as a birthday present?" The son responded. Will you come with me?" The father said he had to work, but he would have the boy and his mother in the front row. What did you enjoy most?" The son replied without hesitation, "When you wrapped me in your coat."
The Game Beyond the End Game is about creating free time so that it can be filled with things you and your family choose to do, not things that people or entities outside the family demand of you. He is so awed by what he sees, including the injured Fisher King and the King's castle, that he fails to ask the question "Who serves the Grail?" The next morning, because he did not ask this crucial question that all seekers must eventually ask, he is sent away and the castle disappears behind him. The Game Beyond the End Game's true purpose is revealed in this story: If we don't strive to find the answers to our own life's questions, the wounds of this world can stay with us for far too long.
