Here at Sabio Books, we talk about the best books for entrepreneurs, business owners and investors. Today we turn again to the investing side of the coin. I want to share with you, in this series of articles, the pieces of investing advice that I wish I had known when I first started investing. Through the blessing of time, I have learned just how valuable they are. The investing advice that I share with you comes from my favorite books on the topic of investing, but more so from my own experience putting these investing principles into practice. Each one of the investing tips we talk about, if you apply them rigorously, can vastly increase your success. Use them all, and your portfolio of investments will, I expect, benefit tremendously.
Even more importantly than all that, the investing advice we discuss will help you reach your goal of not just being a great investor, but living the life that comes with having made great investment decisions. A life, I suspect, that is defined by freedom.
Lesson 2 – Invest in What You Know
Every investor has their list of mistakes, whether they want to talk about them or not. I certainly have mine. I bought Bitcoin the day that it reached its peak price (greedy and dumb)! I also lost six-figures investing in a cannabis business in part because of relaxed due diligence on my part and rushed decision-making. I was foolish to dive into those industries simply because of the exciting prospects at returns versus an investment made on strong fundamentals. I´m willing to admit that my greed got the best of me. Those mistakes were certainly learning experiences (and, fortunately, tax write-offs).
But those gut punches and the lessons learned from them have also led to lots of wins in the market, in real estate ventures and through venture capital investments in businesses I knew, understood and was passionate about. I am writing this article to help other investors avoid similar mistakes of rushed and poor judgment. If you have already been through some of these unfortunate losses, then I think you will agree with my assessment and advice here: invest in what you know.
The Benefits of Narrowing Your Investing Focus
If you do not understand the asset class, business or industry that you are investing in, you are going to struggle to do the due diligence required to really determine whether something is a good opportunity. Can you honestly, for example, invest with knowledge of such critical factors as supply and demand, competition and opportunities for liquidity in a business, asset class or industry that you are just beginning to get to know? Seems rather improbable.
Just this morning, for example, I was reading an article in The Wall Street Journal about how a lot of investors are betting on the Swiss currency to rise against the US Dollar and “are casting big bets in that direction.” To me, looking at this currency play as an opportunity would be just that, a bet. I do not know the long-term prospects, nor could I. I do not have experience trading currencies and thus any attempt to do so would really be just learning by trying, which is not a good approach to take to investing. I do not know enough about trading currencies to be able to do the diligence necessary to know if this investment is actually an investment or just something speculators see as a chance to make a quick return in a time of low yields and market uncertainty. Forex? I had to Google it just to talk with you here about it.
I am OK to miss out on these opportunities no matter how tempting the returns are because I have learned the importance of discipline. Investing is just as much about protecting your downside as it is maximizing your upside. What is your downside protection if you are not capable of really scrutinizing an opportunity? I guess it would be that you could not lose more than 100% of the money invested? Even that is not necessarily true if, for example, you get into certain types of speculative market trading.
A lot of people have made a lot of money investing through a narrow lense. If you know real estate, be a great real estate investor. If you know another particular industry really well, focus on stock market opportunity in that industry.
A narrow focus is also critical if you want to be able to take quick and decisive action when an investment in the business, industry or sector you know shows its face and meets your investment criteria. The best investors I know, and where I have had the most success, is when I had clearly defined criteria for where capital would be placed.
Take real estate investing as just one example. It is easy to try to look at many markets and many types of properties. You historically have invested in single-family homes in Florida but now you are reading about and hearing rumblings of opportunity for warehouse investments in Ohio, for example. You are going to be overmatched by other investors who know that market and asset class much better. When you lose focus, you lose the ability to take educated and decisive action.
Be OK with Missing Out
Who among us does not have the fear of missing out when it comes to exciting new investment opportunities? My own fear that lucrative opportunities would pass me by if I did not act led to the mistakes with Bitcoin and investing in cannabis I described above. One thing that history continues to teach us, however, is that we need to be OK missing out on “opportunities.” There will always be others. It is better to avoid speculation where you can wind up with big losses, and sit back and wait for the opportunities you can most confidently seize.
Moving to a New Asset Class – When is the Right Time?
Be prepared and know that whenever you move to a new asset class, business, sector or even market, you are likely to get punched in the mouth a few times. The only way to reduce this risk of a beating is to educate yourself before going in, not to learn on the fly. I suggest that whenever you are going to pursue investing outside of your core that you really take the time to understand the factors that are going to drive the ability for that investment to be successful. I would even discourage relying on so-called experts unless their own experience and track record are heavily reviewed and scrutinized: has what they are proposing worked for them before and under similar market conditions?
You will never know for sure when you are “sufficiently-educated”, but as your education goes up, the likelihood of these thumpings go down. Don’t rush things because you are worried about what you might miss out on. A big setback to your portfolio or a loss of capital could cost you many more opportunities down the road.
“Crawl-Walk-Run” Works Well in the Investing World
Be OK going slow. Once you have taken the time to educate yourself, test what you have learned in practice without overcommitting. Find ways to lower your downside risk. Bring in partners and work with those more experienced than you so that you can grow as you learn, rather than learning from chasing growth. Bad investors try to take on too much too quickly. Sure, big bets can pay off, but the data says that the odds are against you. Building wealth really is a marathon, not a sprint. Betting too big, too early can take you out of the game before the first proverbial mile. It can also be an emotional rollercoaster that is just not worth the potential benefits. Remember, that for us as investors learning when to say “no” is equally, if not more, important than the times we say “yes”.
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