But it’s not enough to just have a portfolio objective – you must also have a personal objective.
Your personal objective for investing is to achieve your portfolio objective in a way that honors your personal values, skills, and interests.
You’re a unique human being who must travel his own path to success. After all, there’s no point in climbing the ladder to success if it’s leaning against the wrong wall.
“Success with money, family, relationships, health, and careers is the ability to reach your personal objectives in the shortest time, with the least effort and with the fewest mistakes. The goals you set for yourself and the strategies you choose become your blueprint or plan. Strategies are like recipes: choose the right ingredients, mix them in the correct proportions, and you’ll always produce the same predictable results: in this case financial success.”
— Charles J. Givens
Investment success is a lifelong process, and humans aren’t robots. The only way you’ll stay the course long enough to succeed is when your investment strategy fits your interests, skills, goals and resources, thus providing emotional satisfaction.
Stated another way, one of the biggest obstacles to success is getting distracted by the endless opportunities that will cross your path.
There are many ways to make money investing, but I recommend you find the one or two that are going to work for you, and not get diverted by all the rest. You must stay the course long-term until you succeed.
For example, I’ve worked with successful real estate investors in single family homes, commercial real estate, mini-storage, office parks, mobile home parks, notes, apartments, and more. Yet, seldom do I meet successful investors who are actively working more than one of these investment niches at any one time.
The smorgasbord approach to investing doesn’t work because each investment specialty has its own twists and turns that require specialized expertise.
Each niche has its own network that you must plug into for success. Each niche requires its own specialized skills and competitive advantage.
Nobody can (or should) be a master of all investment strategies because any one offers more than enough opportunity to reach financial freedom.
For that reason, you must determine which niche has the inherent characteristics that best fits your interests, investment goals, and risk tolerance because that’s where you’ll discover wealth, happiness and fulfillment.
Not every investment alternative is suitable for every investor. Your job is to find the one uniquely suitable for you.
For example, every investment has an “active” and “passive” component to it. If you don’t want to be a “hands on” real estate investor, then professionally managed apartment complexes make more sense than single family homes.
Even greater passivity can be obtained through paper asset investing if that fits your objective.
“Success is the progressive realization of worthwhile, predetermined, personal goals.”
— Paul J. Meyer
However, if you’re age 55 and just starting to build for retirement, then beware of investment advice pushing you toward passive investments like paper assets. Your situation may require the leverage only available in business and real estate to allow you to make up for the late start and still achieve your financial goals.
In summary, if you want to succeed with investing, you must make sure Step 2 of your due diligence process analyzes each investment for congruence with your personal and portfolio objectives.
Below is a summary of the key points in the second due diligence question:
1 Each paper asset investment strategy must have a positive mathematical expectation, and each business or real estate investment strategy must have a competitive advantage or exploitable market edge to place the odds for profit in your favor. This is the source of your investment return.
2 The source of investment return must persist long enough into the future to be reliably exploited (adequate sample size).
3 The investment strategy must be consistent with your personal skills, interests, values and abilities.
4 The investment strategy must be consistent with your portfolio objectives.
5 You must follow the investment strategy long enough to benefit from the competitive advantage without being distracted by other investment alternatives.
When your investment passes these tests, then it’s worth putting your hard-earned capital at risk to try and reach your personal and portfolio objectives.
Your financial coach can be particularly valuable in clarifying these principles and how to apply them because he has no conflict of interest biasing his investment advice since he sells no investment products.
Due Diligence Question #3: What’s My Exit Strategy?
You should always have your exit planned before acquiring any investment.
Why? No investment is appropriate forever.
Times change, market conditions change, and your objectives change.
You have a reason for acquiring an investment, and when those reasons are violated, it’s time to exit without delay. By knowing your reasons in advance, there’s no confusion or hesitation with the sell decision.
The reason it’s important to sell is because your portfolio is a living entity. Selling is to your portfolio what pruning deadwood is to a tree – it makes room for new growth to occur. It’s healthy.
You should never marry your investments.
Polaroid was once a darling blue chip stock that got decimated by technology changes. The rust belt was a real estate boom at one point, and the railroads were the king of transportation … but not anymore.
Everything changes, and you must change your portfolio to be congruent with the times.
There’s no such thing as a “permanent investment”. I’ve never met an investment I wouldn’t sell given the right circumstances. My job as the manager of my portfolio is to understand what those circumstances are, so that I’m ready to take action when conditions warrant it.
“Affairs are easier of entrance than of exit; and it is but common prudence to see our way out before we venture in.”
— Aesop
I must know the assumptions and premises under which I enter an investment so that I can exit as soon as they are violated. Wherever possible, I must pre-define exit points in terms of price to control losses when things go wrong.
For example, I was a partner in a company that invested in real estate tax liens. We developed an entire business model to acquire valuable real estate for little more than back taxes. Yes, we actually purchased valuable real estate free and clear for pennies on the dollar of what it was really worth.
However, despite it being profitable, we exited the business because we learned how a legal assumption critical to the success of our model was simply wrong.
Once we uncovered the false premise of our model, we exited with our profit and moved on to greener pastures. We knew the reasons behind our model, and we knew when that model was invalidated.
Some would question our logic because the model had previously been profitable, but we knew it was just a question of time until the invalid assumption would bite us in the rear.
Similarly, when I enter equity positions, I predefine the point at which I’ll exit based on price behavior that would prove my decision was incorrect.
In summary, you must always predefine your exit strategy because the first loss is usually the best loss.
You