Those of you that have been around the ol’ FU Machine for a few years now might label me as a bit of a cynical bastard. After all, I’ve crapped on your dreams to buy a house, invest solely in stocks that pay dividends, retire early, and told you that, no, that hot chick doesn’t like you. Look, I don’t care if she actually told you she does and stuck her tongue down your throat. She’s just being a tease. Trust me, I know.
It’s not that I’m really cynical. I like to think of myself as more realistic. Look at it this way. There are approximately 5,000 publicly traded stocks in North America, and I own fewer than 20 of them. There’s probably a case to be made for owning 4,000 of those stocks. I just think the case for owning the stocks I do is better than owning something random. In other words, I’m betting on my specific horse, not the field.
I still think the world of private investments is better than that of passive stocks. Most people simply refuse to buy businesses, which brings down valuations for those of us willing to take the plunge. Even things like blogs sell for very reasonable multiples, partly because when you buy something like that you’re really just buying yourself a little extra work.
Basically, it boils down to this. Every opportunity has pros and cons. Passive investments tend to have high valuations. Starting your own business from scratch is risky but potentially very lucrative. And buying a business from someone means you’ve condemned yourself into a world of active management without a clear-cut plan to scale a business upwards.
When you focus solely on the downside of an opportunity, it becomes really easy to dismiss it out of hand. This leads to inaction, which is perhaps one of the worst things you can do to your money.
Opportunity costs are real
I know too many value investors who are too content to let capital sit on the sidelines for years, waiting for the right opportunity.
Some of these guys are convinced the market has been overvalued since at least 2013, and that we’re just a few months away from a 2009-style crash.
And hell, these guys are downright reasonable compared to precious metal nuts. These guys have 50% of their portfolio in stupid stuff like silver coins or gold bars, convinced the world is going to go to hell. Only then will they be kings, exchanging their precious metals in exchange for the loveliest of bodies. FINALLY, GOLD NUTS WILL GET THEIR DUE.
Sure, gold or silver might go up, but that stuff will never pay you a dividend or anything like that. Precious metals have barely beaten inflation over time.
Besides, the problem with looking at the world in that way is you miss out on a lot of opportunity.
I’m the first to admit I think the Canadian stock market looks expensive and the U.S. might be even worse. But countries like Russia, Brazil, and others are downright cheap. There’s opportunity in the developing world today.
It’s the same thing with real estate. I invested in the sector back in the early 2000s, earning great returns on my cash. And then everyone else noticed the space, so I left. These days I still invest in real estate, but through private mortgages and through undervalued REITs.
I’m still finding ways to invest in things, just not via the ways everyone else is.
As long as you keep your eyes open, there will always be opportunities. I’m 95% invested right now, with my 5% cash position mostly as a cash buffer to pay for any big expenses. You should be too.
There’s a term I heard the other day describing this phenomenon that I really like. It’s called having an optimism bias.
There’s little doubt in my mind that the reason why most billionaires became rich is because they have a built-in optimism bias. There’s more to it than that, obviously (hard work and intelligence help), but having the ability to continually put money to work even when things might not look so good is an underrated skill.
I’m not saying you need to run out and buy everything all of the time. That’s silly. You can be selective and still have a healthy optimism bias. It’s not hard for a retail investor to avoid 99% of the market and still end up with a good diversified portfolio. Hell, you can even make the decision to avoid the stock market altogether and invest in private businesses or lending money to your cousin’s real estate business.
The key is to selectively identify opportunities and put your money to work in them. Having a good optimism bias doesn’t mean you invest in everything or even that you’re 100% fully invested. What it does mean is that you’re not afraid to put money to work in opportunities you find attractive.
Master the fear of losing money and you’ll be ahead of your peers. That’s the key. And remember, if the world goes to hell and you lose all your money, you’ll at least have plenty of sympathy.