Invest – and Get Rich

Investment Perspective – March 2017

“Neither the investing method nor the fundamentals of the business are right or wrong because the mood of the market is favourable or unfavourable toward the “stock”. That is because when you really think about it, “stocks” (shares) are all about the financials and the trading price, the share price… the cash up value. What matters more is the economics of the business” 

Peter Flannery

To invest and get rich, just understand, it is more about you than it is about money. “Get rich”, I know sounds a bit crass. I use the term here to emphasize the point about growing and compounding a useful and significant amount of capital (add how ever many zero’s after the number 1 that you think fit).

For example, for those who do not know much about money, they often do not know whom to trust. Worse, for some, they know not how to trust. Also they do not know where to start and they often buy into the “noise” which is what most everyone else is doing, saying and thinking (which is usually not how to “get rich”).

We know this is true. The facts are irrefutable. In most developed nations around the world, around 95% of people rely on a government benefit throughout retirement – that’s right, 95%.

Then there is the army of analysts, professionals such as fund managers, share brokers and the like. For them it is about the financials. The revenues, discount rates, profits, growth rates, P/E ratios and a dozen other things that you will find in any financial analyst’s textbook. So how come all these educated clever professionals are not rich? Well actually some are. Many though, are not.

Anyway, if we just know what is holding us back we can get rid of it and then get on, invest – and get rich. Here is a starting point…

Is this it?

YOLO: In modern vernacular this stands for “you only live once”. For some people their rationale for not getting on with the money game is because, they argue, you only live once so what’s the point in having money anyway – you can’t take it with you when you’re gone. This type of comment is quite valid but in the context of what we are trying to achieve (get rich) not right, any more than following the crowd and doing what everyone else does guarantees to keep you and your money safe and to get you the best returns long term – won’t happen.

FOMO: This stands for “fear of missing out”. This is definitely related to investing whereby some people, particularly when market prices are rising and markets are buoyant, feel the need to “get in”. The idea is that if we are sitting on the sidelines and not investing then we are missing out. The reality is that fast rising prices often move at a quicker pace than the underlying fundamentals that support those prices. It just means we need to be careful.

Of course if we do not know what to do, a good idea to might be to find someone to give us some help and trust them. Jumping into investments whether it is property, sharemarket, your own business or anything else just because everyone else is all over it, is not always an easy road to success. Sometimes it is the fast track to an “investing bad land”.

Compounding growth long term sounds boring but is an important key to success. Did you know that Warren Buffett made 95% of his current fortune after his 50 birthday? Of course, he had plenty of money well before then however the compounding effect of his efforts over time is what gave him the best results. By the way, that demonstrates a very important point about the magic of compounding, especially when it is applied to investment capital that is allocated to business with good economics.

Whilst Berkshire Hathaway had one or two big wins early on, this was not how they achieved outstanding success, but rather by investing in good businesses at reasonable prices then letting the rate of return based on the fundamentals of those businesses (rather than market pricing) do the heavy lifting for them (invest in the business – don’t play the markets). To be clear, Berkshire Hathaway has never been the number one performer on the US market, and yet it has out-performed pretty much everything / everyone else long term. What do you make of that?

Sure, all the clever academics will point to the fact that in terms of cash up value, those returns appear to have slowed down over the last decade or so (yet the long standing 19.1% return is still in place – see the evidence in the ling at the end). Berkshire Hathaway is a victim of its own success because they are now so big. It is difficult for them to invest in anything other than large companies because smaller companies, as Warren Buffett says “don’t move the needle”. Still, you and I might waste significant time, effort and money trying to invest better.

But what about you and I though?

We don’t have Warren Buffett’s skill, however his methodology is largely transferable and does work for us. It has been working for us over many years; it is working for us now and will continue to work in the future because it is simple and fundamental. It is not based on complicated and clever methodology that few people can understand. It does not rely on popularity or market pricing to make money work for us. However it does rely on you and I adhering to the methodology and sticking to the discipline, blocking out “the noise” when necessary and staying the course.

How to invest and NOT get rich

Doing what everybody else is doing in the investment arena is a guaranteed way to slow down long-term returns and at times get caught out with poor quality investments.

Paying too much attention to market noise, methodologies and people that cannot add value to your investment efforts results in a net cost and a burning of capital rather than the accumulation of it.

Worrying needlessly about pricing volatility, politics, unexpected economic events that scare markets and using this as an excuse not to go after real investment growth by being unnecessarily defensive ( where the focus is only on trying not to loose money rather than grow it), is another recipe for investment failure. That is not how to invest and “get rich”.

We know what works already …

Whether it’s my own business in my own private enterprise, a residential property, a big business listed on the sharemarket, the underlying economics always trumps the financials.

The economics of residential property revolves around the location, the state of repair of the property and therefore the calibre of the tenant that can be obtained.

The economics of small business, my own private enterprise are based on the innovation around systems and procedures, the people on the team (human resources), the use of technology and the development of intellectual property (our own way of doing things that provides the edge no one else can offer).

The economics of big businesses listed on the sharemarket revolve around the sustainable competitive advantage, the branding and for those that have it, the eco-system.

Of course, you can always try to re-invent the wheel – but why would you?

We know what works.

The logic and the psychology

Another common practice is for investors to disregard their own psychology as a real factor in their failure to invest and get rich. Most people, particularly the educated academics, can understand and grasp most things – at least logically.

Psychologically however even the clever academics not only do not have an advantage over everyone else, but sometimes are at a disadvantage because of their ability to over-think things, over analyze, over-complicate and to needlessly over-emphasise risk.

Let’s face it, if we lived in a truly logical world where everything made sense then why wouldn’t all accountants be multi-millionaires given their significant skills of analysis and ability to reason?

Why aren’t all the educated professors of economics and other finance academics among the richest people in the world?

It is hard for some to believe. It comes down to money and you. When all is said and done, it is more about you than money. Avoiding the mistakes that most other people make is an excellent place to start. Getting a bit of help is usually also a good idea because specialists have knowledge and skills that you may not.

Following Warren Buffett’s fundamental methodology based on his “equity bond” model will help keep you on track. This is important when markets are in turmoil because you can invest in quality businesses at good prices. It will also help you to step back when everyone else is piling in with gay abandon as markets surge. One thing about investing and getting “rich” … it’s not that glamourous.

I left the best til last, read this …

Warren Buffett’s latest letter to shareholders pointed out something that I have known for many years and you might too.

It goes like this … Investments that are added to Berkshire Hathaway over the years are valued at book value which is essentially what Berkshire Hathaway paid for them when they purchased them.

As time has gone by, most of those businesses have grown and yet the book value on Berkshire Hathaway’s balance sheet remains the same – in other words still priced at the original value at which they were purchased years or even decades ago.

So if you think about it, most of those businesses have grown, substantially in some cases. This means that there is a significant amount of equity inside Berkshire Hathaway that is unrecognised both on the balance sheet and by the markets – strange but true.

At the very least, that is a real buffer for investors should the markets become unsettled or for whatever reason down sells Berkshire Hathaway. That is because some things just do not change no matter what. One of those things is that price and value are not always the same thing.

I strongly recommend you read Warren Buffett’s latest letter to investors which you can read by clicking here.

“We recognised early on that very smart people do very dumb things, and we wanted to know why and who, so we could avoid them.“

Berkshire Hathaway 2007 meeting