Many Investors Don’t Play the Long Game
What I think the main problems that many investors face is that we give lip service to the idea that we’re going to get rich systematically over time.
People say to me all the time that they’re playing a long game, but then they go and make decisions that don’t align with that.
We get mesmerised by wealth babble and a lot of people will get dollar signs in their eyes and get hypnotised into doing the wrong deals. It’s human nature to look for the silver bullet, so they’re trying to understand what they can do that will deliver financial freedom without any risk or friction and in the shortest possible time.
The flip side to this is, if you can tweak your thinking, you can actually build armour in the form of habits and rules that become like a guiding light to taking the right actions. And then our actions and habits with our money become completely congruent with what we want.
We had an event inside of Freedom Warrior a couple of weeks ago and I thought it would be really useful to just share some of the highlights. The intensive theme was the invisible landmines of wealth building, and there’s probably some gold that would be worth sharing that came out of that.
Skills are Not as Important as Time
One of the biggest mistakes that I see investors making is thinking that skills are more important than time.
We all generally understand that the effects of compound interest are significant over time, but sometimes the results of a relatively small amount of compounding can be so huge that they really blow people’s minds.
I want to dive into that a little bit today through the story of our mate Warren Buffett.
At the moment, Warren Buffett has a net worth that’s said to be in excess of about $85 billion. But a lot of people don’t realise that the bulk of that, about 81 or 82 billion, came after his 65th birthday.
So when you start to go into the detail of the decisions that he made, at what points in time, and the impact that it had on wealth, there are definitely some lessons that I want to tease out for you.
So the first thing about Warren Buffett and his fortune is not necessarily that he was just a good investor, but he’s actually been a great investor for more than 75 years. He started investing when he was ten years old and by age 30, his net worth back in the day was about 1,000,000 bucks, which is maybe about $9.3 million in today’s money.
Now if he had spent his teens and his twenties doing gap years and exploring the world, finding his passions, maybe he’d be worth about 25,000 by age 30. And then if he started at that age to get those same epic returns that he’s had consistently over those 75 years, but then he quit investing when he was 60, he’d be worth about $12 million today, U.S. dollars. So that’s about 99% less than his actual net worth.
I looked at that and it blew my mind.
There’s a fabulous investigative journalist in the US who highlighted that effectively all of Warren Buffett’s financial success is actually tied up to the foundations that he set while he was going through puberty. At a time where most people would say, well, I’ve done my dash, I’m just going to put my feet up now, he continued to allow his investments to compound and stayed active in the management of his money.
So the real key takeaway here is, his skill was definitely his capacity as an investor. Everyone focuses on that element: how does he pick his stocks? How does he make his investment decisions? What are his rules?
But his real secret was time, and I really want you to pause and marinate on that because it’s not what people expect to hear about when they talk about Warren Buffett.
Good investing isn’t necessarily about trying to race out there to earn the highest returns. It’s really about earning returns that you can live with, that you can stick with and that can be repeated for the longest period of time. That’s when compounding will really go completely wild.
So if you look at Warren’s returns on average each year, he’s averaged about 22% per annum, which is phenomenal. There’s no question, that’s an outstanding result.
But I just want to drive this point home. He’s a great investor, but his secret was time. He is described as the richest investor and best investor of all time, but he’s not actually the greatest investor when it’s measured by average annual returns.
Warren Buffet & Jim Simons Comparison
Now I want to contrast that to another fellow by the name of Jim Simons. And you know, frankly, most people have never heard of this guy. He’s not a celebrity. He’s certainly not in the public eye.
He’s originally a mathematician. He’s a billionaire hedge fund manager and philanthropist. And his current net worth is only about 20 plus billion dollars. So significantly less than, almost a quarter of, our friend Warren Buffett.
But the truth of the matter is he didn’t actually start investing with any great vigour till he was about 50. He has a record of compounding returns at about 66% since 1988.
Nobody else on record has even come close to those sorts of returns, so he’s had not even half as many years investing as Warren Buffett. If he had been investing as long as Warren Buffett, the numbers of zeros in his net worth would be in the quintillions. So for most people, this is a complete mind bender.
I started this podcast saying that you don’t have to be superhuman to build a lifetime of significant wealth, so I want to drive home what I think the key takeaways from these two different stories are.
Never Selling Your Assets is a Tough Gig
People revere Warren Buffett as the greatest investor of all time. But mathematically, in terms of annual average returns, he wasn’t necessarily the best.
We all understand compound interest and there are a lot of wealth professionals here in Australia who argue that you should buy assets and then never sell.
If you’re talking about the Baby Boomer generation or people who may have had the opportunity to buy real estate or shares here in Australia back in the 70s and 80s and then they’ve just held onto them, it’s easy to be from that camp and just say, well, you should never sell because look at us.
But, given the way that the world has evolved, I think that’s a pretty tough gig. I think if you put money into an asset that either doesn’t perform or costs you a bomb to hold, it’s really tough to hang on just because people before us said you should never sell.
The cost of living is expensive. The pressure to maintain a lifestyle for many is very high and there are a lot of wealth professionals that have written that philosophy of “never sell, ride out all the highs and lows of every market cycle” as their main philosophy and have basically banked on that.
In other words, they’ve made money by telling you to hang on, regardless of whether they’ve done the same. We’ve all experienced or heard of someone holding a dud property maybe just because it might come good even if we’re carrying a loss.
The real problem for modern day investors is that competition’s fierce. Everyone is out there looking for an edge, everyone is out there looking for where they can park their capital so that they can amplify their results over time.
Good deals are becoming harder to find. Returns are becoming more modest. I just don’t think you can afford to ignore assets once they’re in your portfolio. I think you need to keep evaluating them and looking at their strengths, their weaknesses, and their prospects.
I say this all the time: there’s no right or wrong, but it’s really important that you continue to look at opportunity cost and the potential impact of your investments that make up your portfolio.
The Reality of Investing
You know, sometimes it’s OK to take your investing capital and use it to springboard into better, more sophisticated deals.
This doesn’t take away from the fact that wealth compounds over time, but the reality is, sometimes you’ve just got to shut up and wait. I know that sounds a bit rude, but sometimes we dance around too much, we pull up stumps too quickly and we’re too quick to try and find a better deal.
Then there’s the cost of entry and exit and turn over. Sometimes we have a yield drag because we can’t find the next best deal or getting out of a deal thinking we’ll find something better and then not being able to.
So they’re the two ends of the spectrum. As an investor, the real skillset is working out how to discern that it’s time to turn over your capital; how to recognise that something might be in a dip, but it’s worth holding onto.
Take one step at a time to continue to grow your wealth. What we’re really arguing for here is trying to earn pretty good returns that you can stick with and that can be sustainable, that can be repeated and that will always win out over wild returns that just can’t be repeated or held onto.
And certainly we’ve seen that in the market over the last 12 to 18 months, as a whole bunch of investors have been patting themselves on the back about these amazing returns they’ve had in the share market and the property market, purely because there’s just been a Black Swan event.
Those are not sustainable returns. They’re great when they come along, but playing the long game and refining your capacity to give your portfolio the love and attention it deserves is what will have the biggest impact over time.
Final Thoughts
I hope you found this useful.
I look forward to discussing with you more and more topics around our stories and insights which will help you understand why steady preservation and safety will always win over these scary, extreme returns.
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.
If you’re interested in understanding how to create wealth through alternative strategies, please check out my programs, where I help you catapult your investment income and blend strategies to shave decades off your timeline to financial freedom.
Or, you’re welcome to get in touch today, book a call with me, and I would be happy to talk you through it – no obligation!
