I recently had a conversation with an investor about what they managed their portfolio and what changes they’d been making in 2020. This investor was closer to the HNWI bracket than most individuals, but whilst their portfolio size and focus differ from most, I was still able to identify three key ideas for their wealth management strategy which might be useful for investors trying to establish a framework for controlling your investments;
- Active Investment. Many investors design a strategy that actively seeks investment opportunities across different company sizes, sectors, and geographies. They see this segment as an opportunity to actively identify and manage the best opportunities. By actively managing their allocation of stocks, bonds, and other securities, the investor is more readily able to manage the sourcing process to focus on the best opportunities in the market.
- Conservative & Cash Flow Positive Real Estate. A significant number of investors I speak to like to directly own cash-flow positive real estate. Many buy properties that are small or local using a property agent to oversee and manage them on a day-to-day basis. For those investors with more significant net worth, they may allocate through a handful of real estate boutiques which enables them to select individual deals and manage exactly where their capital is deployed.
- Directly Controlled Business Interests. Continuing the theme of control, this segment enables the investor to retain significant control in an area where they have a reputation, knowledge, and significant assets. These combine to enable them to swiftly and accurately undertake valuation and due diligence to identify the best opportunities in that market. Investors with directly controlled business interests are often most comfortable with their ownership of this segment, viewing themselves as ‘experienced operators’ with a proven track record of execution.
These three areas have a common theme of control but this is consistently partnered with the need to be a ‘savvy investor’ and comes back to a theme I’ve written quite a lot about; financial education.
The investor used an analogy of his investments being an articulated lorry traveling along a motorway. The lorry is well constructed for long-distance travel and has an experienced driver behind the wheel. As such, there is reasonable certainty about the direction it will continue to travel in. In theory, it can travel forever at a steady pace, only needing to stop occasionally for fuel or for the driver to rest.
Of course, if you suddenly swapped the experienced driver with a toddler, you could reasonably expect there to be a fairly big crash at some point. It won\’t matter how well the truck is constructed, the toddler won\’t know what to do – they might ‘mimic’ the driver by spinning the wheel but this will likely be the very action that causes the truck to crash.
We then started talking about how to prevent ourselves from being that metaphorical toddler; it’s one thing to mimic successful investors (randomly rolling the wheel and jolting across the lanes) but at some point, we’d all admit that the ‘driver’ clearly has no idea what they’re doing. I think we can all agree that this wouldn\’t be a great framework for controlling your investments.
This idea of financial education was an on-going journey; how does a person know that they’re educated? There are a few indicators, such as portfolio performance over time and relative to other benchmarks, but also in an investor’s ability to understand the various outcomes from making an investment and why they might occur.
I was reminded of another conversation I had with an investor who, within moments of meeting me, was asking about my ‘top picks’ in my portfolio. Although I’m not averse to talking my book, I personally learn far more from trying to understand the psychology and strategy behind other investor’s portfolios than by trying to copy their picks.
I’ve recently spoken to a number of investors that are starting out and pretty much without exception, all have asked me wanted to talk about what I’m invested in without wanting to spend much time trying to understand my strategy.
This is a big mistake. Without having a strategy an investor is essentially the baby at the wheel – you need a framework that helps you to strategically construct a robust portfolio that you understand and can rely on when conditions get tough. In my opinion, this is the biggest reason for retail investors panicking when volatility spikes; they don’t know why they’re holding what’s in their portfolio and they have no real idea of its value. As such, they have no process for controlling their investments; it\’s just pour money in and hope for the best.
If you’re educated, then you understand the value of the companies you hold. Value comes in a number of forms, but for me, it’s all about the profit a company can generate. If I can give a company £1 and get £1.10 back next week, I’d want to give that company as many pounds as I could get my hands on. By the same token, if I also knew of a company that could give me £1.15 back for every £1 I gave them, then I’d want to invest my money with them over the first company.
As an investor, this is essentially my foremost consideration; how much money do I think I can get back for the pounds I invest? How long do I think it will take me? What might stop me? What other options are available? At its core, this is what controlling your investments is all about; the alternative is giving your money to someone you barely know and hoping that they ask the same questions (and get the right answers!).