What we've learned from 40 years of investing

July 10, 2023

The information on this site is targeted towards families with a net worth of $10M - $50M. We aim to provide information regarding investment strategies to help you maintain and conservatively grow your family’s wealth. The articles cover a variety of topics, including risk assessment, portfolio management, alternative assets, leverage and general information about financial products.

I have two kids, both very smart; one is a quant analyst for a hedge fund, the other actively manages a small portfolio that has handily outperformed mine. These are topics I discuss with them in preparation for managing the family portfolio. They already provide input, but in the near future, they will have sole responsibility. Neither of them currently wants the responsibility, but at some point in the near future, they will have to take over. I’ve been investing for close to 40 years and have made many avoidable mistakes. Most of the wealthy people I’ve met have also made mistakes. Recounting all these avoidable mistakes either I or my friends have made would be quite an undertaking. This site is a beginning. My goal is that my kids will use the site as a partial reference for their investing practices and hopefully reduce their unforced errors.

Here are a few of the common mistakes I’ve encountered.

1 – Investing in what appeared to be “low risk” strategies that would convert regular income to capital gains. We had short-term capital gains (regular income) from 30 year Treasuries we sold. I talked to a couple well-known tax accounts regarding a strategy to convert this short-term gain into a long-term gain. The catch was if interest rates moved quickly in the wrong direction, there would be a significant capital loss. If it were riskless, the IRS would disallow the transaction. We passed on the strategy and paid the short-term capital gain tax. I’ve met people who invested in this type of strategy and lost a significant portion of their net worth.

2 – Many people become rich with an investment strategy that is high risk, high reward. Some continue to pursue this strategy after they’re already rich. One answer I’ve heard when I asked why is “I’ve made money doing this for 20 years, why should I change now.” An example of this would be continuing to run a very concentrated high-risk equities portfolio. For some who refuse to modify their investing, they get double rich, for others, they become half rich. This inspires one of our credos. You only have to get rich once. Then your responsibility to your family is to stay rich.

3 – There are people who get rich investing in stocks and bonds and have 40 years’ experience understanding markets, fee structures, black swan events, and the different asset classes. There’s another class of rich that made their money in sports, medicine, the law, running a business, inheritance, etc. Some entrust their money to an investment advisor. They’ve read the hype about hedge funds, private equity, RE Development and other high-fee, high risk investment structures in which they think they’re supposed to participate. They invest a significant portion of their wealth in these vehicles, sometimes with very poor results. I’ve met numerous formerly rich people who were left broke by Bernie Madoff. Having money is a big responsibility. If you leave the task of managing it to someone else without your keen oversight, you risk what you’ve worked so hard to achieve.

Warren Buffett’s suggested investing strategy is far superior to most of the strategies employed by the wealthy people I’ve met. He recommends investing 90% in an S&P 500 index fund and 10% in short term treasuries. If you don’t want to invest the time to learn about asset classes, fees structures, conflicts of interest, and the other details discussed on this site, go with Buffett’s approach. Some wealthy people think they must be involved in exotic, high fee investments. That’s their misconception. Think for a moment: can an investment advisor truly have more insights about the market than Warren Buffet? If your answer leans towards “no”, why are you paying for their guidance? Get a good financial planner or accountant that you pay by the hour and stick with the 90/10 strategy.

The investment strategy we use is dividend-based. Our portfolio yields a little over 2% per year in dividends and we use that income to fund our expenses. The funds that remain after expenses are used for investments. If we used an investment advisor who charged ½ a percent management fee and mutual funds that also charged ½ a percent, we’d lose almost half our income. Many advisors and funds you come across will charge substantially more than ½ a percent each. At 1% each, they’d consume almost 100% of our dividend income. We’re not against investment advisors- we’re against fees that are based on AUM. As discussed in another article, Vanguard offers a dedicated investment advisor for $8,750/year (according to their website) based on a $20M portfolio. An advisor who charges ½ a percent on that same size portfolio would cost you $100K/year. Fees charged by an advisor are deducted from your account as are the fees charged by mutual funds. If you received a bill each year from your advisor for $100K, you might reconsider the relationship. That’s why they don’t send one.

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