Those that we revere as exceptional investors still get it wrong some of the time. Loss in the context of many, many wins is a much better lens to adopt and use as a world view when you’re judging your own results.
So I think the easiest way to express some of these ideas is to share some stories that maybe you haven’t heard of, but which really showcase some of these principles.
The Story of Heinz Berggruen
So I want to tell you about a guy, an art dealer by the name of Heinz Berggruen. I don’t think he’s with us anymore, but he fled Nazi Germany and went to the US to study literature. And in 1940, while on a honeymoon, he bought his first piece of art.
He went on to collect quite a vast personal collection of artworks, and in the year 2000 he sold that massive collection of art for about €100 million. The interesting part is that the German Government felt that they had a better handle on what that art collection was worth, and they described it as a bargain.
Now, what was really interesting about this particular art collection is that it’s believed that 99% of it was actually of very little value, only about 1% of it turned out to be ridiculously valuable.
People who heard that story were completely shocked. Some people said, how did he do that? Art is so subjective. Was it luck? Was it skill?
Research into the world of art and art dealers has been carried out extensively, and one particular firm called Horizon Research said that not only does it happen all the time in the art world, but it actually happens all the time in mainstream investing too.
You Can Be Wrong Majority of the Time, But Still Get Rich
So art dealers think and behave like index funds. They buy what they like, they buy what they believe in, they buy where they see potential. I guess what we hear about and what we see in the media is those that get it right.
So a tiny fraction of what they buy may turn out to be super valuable, and the rest of it may end up on the scrapheap. But it is a bit of a mindbender to consider the idea that as investors, which is effectively what art dealers are, you can be wrong the majority of the time and still end up filthy rich.
We see it happening with venture capital firms all the time. Venture capital firms expect that the money they dish out to these startups will be wrong 80+ percent of the time. They expect a small fraction to do OK, and they expect a tiny percentage, like 1 to 2%, to go insanely well.
So we look at that and understand that in the investing world and in the venture capital world, that’s kind of the norm.
Index Funds Are Not What You Think
Venture capitalists and art dealers, you could argue, are playing the probabilities. But as an outsider we may look at that and say, well, those odds are just too scary for the average investor.
I think what’s really interesting is to look at something that we all take for granted as being super safe, which is that of index funds. We think it’s diversified. We think if we go into an index fund, there’s a little bit of money in a lot of things, so we’re probably going to be doing OK. But if you look at the performance of individual shares or investments that make up something like an index fund, sometimes the stats can be a little scary.
One story in particular was an investigation done by JP Morgan Asset Management who published papers talking about the distribution of returns for an index called the Russell 3000, which is a broad collection of public companies that have been around since the early 80s.
Now what they suggested was that 40% of those companies actually lost 70% of their value over that time and just never recovered. And that the overall return of the index came from a tiny fraction of those companies, something like 7% that just outperformed everything else by a country mile.
So when you look at the overall performance of that index over time it’s increased by a multiple of about 70, and people call that a spectacular return and people call that success. But it’s probably not too dissimilar to the ideas that we think of when we think of venture capitals and capitalists and art dealers. And yet that doesn’t seem palatable to us.
Play the Long Game with Investments
Investing really has the same principles. Most financial advice that you go out and look for is about today: what should I do right now given the current market environment? What looks most profitable right now? How can I create alpha? How can I outperform the norm today?
But what we need to do is continuously remind ourselves that we’re playing the long game and we need to remind ourselves that it is possible that of all the investment decisions that we make, maybe only a small fraction of them will have a big impact on our end result.
And right now, if we look at what’s happening in the world today, there are a lot of people who are investing from a place of FOMO or fear of missing out. There’s a lot of froth. People are tolerating inflated prices and what we need to do if we want to set ourselves apart is actually continue to keep a level head.
An example of this is investors that kept a level head during the global financial crisis, that saw opportunities and probably created more wealth during that four to seven year block of time than they did in the rest of their lives.
So it’s really important to understand that your success from this point forward could be massively more impactful than all the years of trying to do the right thing and run the standard playbook on cruise control.
Key Takeaway Lessons of Investing
Where I want to wrap this particular podcast up in terms of the lessons that I think you should glean is: there are so many stories out there that tell us how super successful investment winners reach that point, not because every single decision they make results in a home run – but because they get a small fraction of the important decisions right.
I think we underestimate how normal it is to stuff it up, and we overreact when we make mistakes. What I have witnessed many, many times is that the emotional impact of loss for some people is just so overwhelming and they beat themselves up about it so badly that they never emotionally recover. And then they never put themselves out there again. Their desire to stay safe and avoid loss cripples their capacity to make good investment decisions.
If you’re only investing in traditional property and traditional shares – because it’s so expensive and because you’re not nimble enough in the way that you diversify in structure – I get that it’s really hard to carry a lemon because there’s such huge assets.
But as we become more broader with our investing and we take on things like alternative investments where you can put small amounts of capital, you can be more nimble, your requirement to rely on a rising market is much smaller, then we move past this idea that every single investment has to be that home run.
Many people are witnessing (certainly in my world and my client base) that the returns they are getting on a very small percentage of their capital that they’ve put into alternative investments are completely outperforming all of the results that they’ve had, maybe in a broader cross section of investments, and maybe what people might describe as mainstream. And even though they’ve done all the right things, a disproportionate amount of their passive income now comes from this other area.
Final Thoughts
Nobody makes good decisions all of the time. If you’re a really good investor and if you talk to people who are really top of their game, they will argue that most years are just OK. And then every now and then, they’ll have a massive result and it’s really normal that things will fail and not always work out.
I think the best example of this is, again, Warren Buffett and what he represents for a lot of people. If you actually pull back the curtain and have a look over his life, he talks about having invested in 400 to 500 different companies and businesses. But what’s fascinating is he actually only made the bulk of his money on about 10 of them. And his business partner, Charlie Munger, goes even further to say that if you took even a couple of those winners out of their portfolio, the Berkshire Long term track record is actually pretty average.
So I think the big finale that I want to talk about is, it’s OK to make a loss. We need to get past that and digest that a lot better than most of us actually do. It’s not so much about being right all the time or never getting it wrong. It’s really about how much of the time you get it right, and what sort of money you make versus how many times you get it wrong and the losses that you might suffer.
So I hope you found this really useful. I’d love you to get in touch if there are ideas or threads that you’d like to go deeper on, but in the meantime, take care of yourselves and remember that the journey around having a great relationship with money also requires us to digest the loss and the mistakes and they’re just as important, if not more important, than celebrating the wins.
If you’re a business owner feeling frustrated that despite doing everything right in the property investing playbook and you’re no closer to financial freedom, then head over to www.inkosiwealth.com to learn more about how you can use alternative investments to catapult your investing income and blend strategies to shave decades off your timeline to financial freedom.
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