There is a misconception that rich people have a super investment strategy. Most have a basic understanding of investing.
Warren Buffet known as the world's best investor does have two investment rules:
- Never lose money
- Never forget rule nr 1
In 2004 he owned 474 998 class shares of his own company Berkshire Hathaway and started donating. If he held those stocks he would have 230 billion.
And it seems like many rich people follow this principle by doing less risky investments. Safe to say that many rich people understand risk. Or at least respect it.
Many rich people have long-term thinking about their wealth. which often stretches for many years and even centuries.
And they have pretty nice and boring investments on average.
Protect Against Inflation
Investing is more than a means to increase our wealth but also essential to protecting it.
Inflation is eating away at the value of money, causing it to have less buying power.
For the majority of people, this is hard to understand. We see the numbers in our wallets increasing.
But the prices in the stores are also increasing.
If we can buy fewer goods for more money, we have lost money.
Forcing rich people to invest otherwise, they will lose future buying power.
Investing isn’t an option but a necessity for the protection of our wealth. Saving money is worthless if the sole purpose is only consumption.
Private & Public Markets
Private Markets mean investments that are not on the stock market. Most rich people started by doing business/investments in other types. and then investing in public markets
We often hear about how much rich people make in the public markets. But tend to forget how it got started and other kinds of investments they have.
“Diversification is protection against ignorance. It makes little sense if you know what you are doing” - Warren Buffet
So if we know that we don’t know enough about a certain investment. We can buy another different one and then spread the risk that way.
Investing outside the market and in many different assets or could be assets. Buying something that protects against inflation can also work.
It’s good to broaden the horizon and look for investments in other countries.
Rich people have a lot of diversification. And it makes sense since they have so much money and want to protect it for any kind of scenario.
But I would say that it makes less sense for the rest of us. Since we wanna get rich we want the highest return.
Protecting wealth is not the best option if you don't have any.
Nonetheless, it's important with diversification and is why it’s so used by rich people.
Keeping overpriced investments doesn't make much sense. But many people assume that because something has been a good investment it will continue to be one.
The ultra-rich can’t buy and sell assets as we can because of their huge volumes.
When they buy something they push up the price since the demand is high and often have to pay a premium.
And when they sell the demand is low so the price also decreases.
It doesn't make much sense for us to copy the ultra-rich people's investments. Because of their inability to buy and sell as we can.
Investing in Tangible Assets
This is why rich people like this kind of asset since it is almost impossible to lose all value on a tangible asset.
If you buy a car it can break down but you can at least sell the parts that work or in the worse case sell the metal scraps.
Real estate is often an expensive investment but you can buy REITs. That is a company that buys income-generating real estate for you. Or you can buy stocks that are real estate companies.
Gold has some uses in electronics but most as jewelry. Still, it is a popular tangible asset that many banks and rich people hold.
Having an investment strategy is crucial if we want to know when to buy/sell.
Fear is one of our most basic emotions and is a signal of danger.
Most beginners feel emotions like fear and that makes them sell when something goes up 10%. Since they have the fear of losing that earned 10%.
And sell when down -40% since not working out.
Our emotions alone are not optimal for the stock market. And rich people know this.
Here are some basic strategies.
Value investing is a very popular strategy that means that you buy a business for less than what it is worth. It’s easier said than done.
Deep Value Investing is buying a company so cheap. That even if they liquidate you stand to earn something. So you buy a company with tangible assets that are selling for less than the stock price.
Developed by Benjamin Graham Net-Net is an easy technique to get started with.
Index Funds Investing this is accepting that we can not likely beat the market or don't have the time for it. You buy into an index fund when you have cash available. And hold it for as long as possible.
For most strategies, it’s very important to do a fundamental analysis of the company or asset.
And doing some stock valuations can also be a good idea.
There are many different strategies and here is a list of a few more.
For example, investments in Russia which is an emerging market have been catastrophic. Because of the war in Ukraine.
People that own the Russian currency ruble have also had it devalued. By looking at what has happened to Russian we can see the risks involved with emerging markets.
There are a lot of bargains in those kinds of countries, but they are most likely poorer than US and EU.
Finding opportunities is due to the fast economic growth these countries are experiencing. Suppose they are growing and not decreasing.
Followed by a high growth is sometimes a high downfall due to volatility.
Having investments in other countries also provides extra diversification.
Buy Low Sell High
When the markets experience a downfall people freak out and sell.
When the markets experience a rise people are optimistic and buy.
But in reality, we should do it the other way around, but it’s simpler said than done.
Even rich people tend to doubt their investments. When they are not going in the right direction but many still do follow their strategy.
Many rich people find that buying companies when most people are selling them. Provides them with a cheaper price of the same asset and that in turn means less risk.
If we are banana salesmen. We buy bananas for a living and sell them for a profit.
If we pay less for a banana we should earn more if we always sell them for the same price. And if they turn moldy we throw them and in turn lose less because we paid less. This is buying low sell high.
It’s still important to analyze the asset we bought to see that it’s worth the lower price we paid for it. We have to check the bananas to see if they are not moldy before buying them.
Buy low sell high works for everything, it does mean buying when there's a discount.
We’re used to shopping for bargains right? Make sure it’s a bargain and not some sales tactic.
If a t-shirt is 50% off it does look more appealing for people, but assets. It’s often the other way around because they fear they will lose money. After all, it has dropped in value in the past.
Understanding somewhat what the value of the company is. Will provide us with the knowledge of knowing when it’s cheap or too expensive.
Buying low and selling high doesn’t mean that we will buy at the bottom. Or at the top because it’s hard to know when we hit the bottom or hit the ceiling.
So it will sometimes feel like we haven’t made a good deal but in fact, we may have done a very good one in the long run.
Mimic the rich and have the patience to buy/sell. Procrastinating can provide very good returns if we don’t miss a good buy/sell opportunity.
Finding discounts is often about looking for historical prices of assets. Also, looking for one year is often not enough.
There are some mixed feelings when it comes to cryptocurrencies.
Many rich people have turned to having some cryptocurrencies in their portfolios. But treating them as the speculative asset it is.
And for others, try to completely ignore it since it’s speculative and not a tangible asset.
There is still a doubt about cryptocurrencies. And for good reason so many rich people avoid it.
But it’s hard to completely ignore because of the mere size of the crypto market.
We could mine cryptos whenever it’s possible, to at least have some exposure to that market.
Don’t need to have a supercomputer but any could do. Here’s a guide from Reddit.
It’s hard for most people to predict cryptocurrencies. And what is going to be the best investment so for good reason it’s treated as very risky by rich people.
And it could be a good reason to mimic their mindset about cryptocurrencies.