How should I invest my savings (part 2)?
One of my favorite quotes in life is from the one and only Mark Twain:
“Get your facts first, and then you can distort them as much as you please.”
In part 1 of “How should I invest my savings,” we covered the “get your facts first” portion of this two part series. Now it’s time to break some fuckin rules, and try to make more money than we otherwise should. Saddle up cowboy!
Let me say this more plainly. What you are about to read is bad investment advice. If you had a smart, level-headed friend who is financially literate, she should tell you not to do anything I’m about to write.
Pick individual stocks
In part 1, we learned that most investment professionals don’t beat market returns. When the pro’s try to pick individual stocks, they usually fail.
But you’re not an investment professional, which gives you an advantage that investment professionals don’t have… You presumably in work in an industry. Maybe it’s tech for healthcare, education, ads, whatever. Part of being good at your day job is knowing wtf is really going on in your industry. There are bound to be companies that you think most investors don’t see their full potential.
If they’re publicly traded, buy those stocks. I’m good with it. I only have two rules when you do this:
Rule #1: only buy stocks in industries that you work in. That’s your advantage. Use it. If you work in education, don’t buy a car stock (cough, cough, Tesla).
Rule #2: Don’t invest an unreasonable percentage of your assets in stock you’re picking. Personally, I’ve always limited these picks to less than 10% of my assets. If you do your homework, I’m okay if you go a little higher than that. Going over 50% would be crazy imo.
Buy real estate
In many parts of the US, you can do something with real estate that is going to sound batshit crazy to anyone living in the Bay Area, NYC, or LA. You can:
- Buy a house
- Finance it with a mortgage
- Rent the house
- And the following equation will be true
Rent > Mortgage + Taxes + Insurance + Property Management + Repairs
So you have rent money left over, and your tenant is paying down your mortgage and other costs for you.
This option is not for the passive investor. Real estate takes work, and there are a ton of ways you can screw it up. It’s not like buying the S&P 500. It’s not even like buying Amazon or your favorite stock. You have to pick a real live house, make sure it’s financially sound, and avoid the plethora of shady people in real estate. You may even have to evict a tenant.
But lots of people do it and do it profitably. Many even soundly beat market returns, but it’s not easy. If you’re curious, check out:
The Book on Rental Property Investing
Bigger Pockets (the real estate investor’s social network and Q&A site)
Own a boring small business
Some of those random small businesses you’ve seen, maybe even used, but never thought of actually owning beat market returns. Laundromats, franchises, random niche ecommerce sites… things like that actually work in some cases. But similar to real estate, you have do your homework. Owning a business is serious work.
Crypto currency, I’ll have some of that too
I’m not going to debate bitcoin here. I’m over it. I’m just going to ask you to do a thought exercise.
Do you think there’s a non-zero chance that bitcoin, in the long run, will stick around and be worth more than $0 a coin? If so, continue. If not, skip this section.
If so, what’s the highest you’d reasonably expect it to be worth in 10–20 years?
If you’re having trouble answering that question, know that Bitcoin’s closest historical comparator, gold, has a $7 trillion market cap. As of the time of this writing, Bitcoin’s price is $9,152 and has a market cap is $162 billion, about 2% that of gold. If Bitcoin caught gold (and gold’s price stayed the same), it would be worth over $400,000 per coin.
Now, that you’ve picked a number. What percent chance would you give Bitcoin of achieving it’s full potential?
Now multiply that percentage times the price you came up with. Is that expected value higher than Bitcoin’s current price? If so, how much higher?
Imo, Bitcoin is an example of an asset with a very high potential payout but also extremely high risk. However, if it’s expected value is high enough, it’s worth putting a small percentage of your assets and taking the risk.
What not to do
- Angel invest. If you’re worth $10M+ and you want to break off $1M and write 20 $50k checks, by all means, go for it. But for most of us little guys, the minimum check size is too high relative to the level of risk. Not to mention, it’s actually very hard to pick winners well enough to beat investing your money at market returns.
- Trade on the margin. If you’re deadbeat with no motivation to work and make something of yourself, trade on the margin. Gamble your creditworthiness and reputation to see if you can nail that one big score and live easily. If you’re not, then work hard and get rich slow.
In conclusion
So what did we learn?
- This post has terrible investment advice
- Even though most investment professionals don’t beat the market, there’s no fundamental reason why you can’t
- But it’s hard, and if you don’t do your homework, you’ll get smoked
- Don’t angel invest and don’t trade on the margin
If you’re going to follow any of this terrible advice, I have one piece of good advice. Pick one thing, and try to do that really well. If you want to pick stocks, don’t buy real estate. If you want to own a small business, don’t pick stocks. Invest all of your time doing this into one thing. Pick as small of a niche as possible and try to do it really well. By the time, you think you’re an expert in that very tiny niche, start investing your money.
Assuming you like taking bad advice.
