Did you know that gambling is legal in all 50 states?
It’s called the stock market and with people cooped up from the COVID-19 crisis and with casinos, race tracks and live sports suspended, day traders have turned to the stock market for their gambling fix.
Warren Buffett has warned against the dangers of speculating for years and day traders have been ignoring his warnings for years.
Warren Buffett doesn’t like speculating because it fuels boom and bust cycles that destroy portfolios and retirements and ends up hurting everyone. The dotcom bubble of the early ’00s and the mortgage-backed securities frenzy that led to the Great Recession are examples he often brings up to make his point.
If you know anything about Warren Buffett, it’s that he doesn’t chase fads or shiny objects. He’s very old school in the sense that he likes companies that have been around and that have a proven and profitable business model. He doesn’t like crazes like the latest one that’s sounding the alarm across the markets.
What’s the latest craze?
Day traders have been scooping bankrupt and distressed companies up in droves in recent weeks, giving experts and Warren Buffett the middle finger, proclaiming that stocks can only go up. That’s not exactly true. The stock market will undoubtedly recover, but it’s not true that all stocks will go up.
Unlike an investment in a tangible asset like a building, farmland, or equipment, investments in bad stocks could actually become worthless.
Just look at the countless dotcom and financial stocks wiped out by the dotcom bubble and mortgage-backed security debacle.
Everyday investors who speculate do it because they lack the know-how for long term wealth building so they develop an unfortunate tendency to jump from one short-term investment strategy to another, depending on whatever the prevailing trend happens to be at the moment.
They are also likely to be the first one to jump ship at the first sign of trouble. And unfortunately, speculators are often the majority and not the minority.
Investors with short-term investment windows like kids with ADD jump from one fad to another and the problem is they often purchase a stock when it’s near its high then sell near its low. Timing the market is a fool’s errand as very few investors have consistently beaten the market.
Heck, even 92% of hedge fund managers, financial advisors, and other professional managers fail to beat the market. This is obviously not conducive to building wealth.
Wealthy investors, on the other hand, tend to put their money in long-term investments that have historically performed well.
There’s no magic wand for how they build their wealth. They don’t belong to some secret society. It’s all very simple and boring when it comes down to it.
The wealthy like to put their money to use in something productive where the asset itself will work to make capital grow through both cash flow and appreciation.
Finding those productive assets requires the wealthy to look at the merits of the underlying opportunity and not the odds of hitting it big.
The overriding factor in the ultra-wealthy investment process is whether an asset can stand on its own – no matter what the rest of the market is doing and no matter what anybody else is willing to pay for it.
- Will a property continue to generate rents in a downturn?
- Will farmland continue to produce a valuable commodity?
- Will a natural gas well continue to fuel energy needs?
The wealthy have simple needs. They invest in assets:
- That can be found in proven markets.
- Where demand has been proven.
- That flow cash.
- That grow.
- That are tangible.
- That have a low correlation to Wall Street.
The wealthy have a long investment window.
They come up with an investment strategy and stick with it because they know the worthwhile investments will take time to gestate and the caretakers of the investment will need time to nourish and cultivate the asset.
They ignore all the noise and stay the course no matter what the latest hot investment trend currently is or even how poorly their investment may be doing at any given moment because they know – long-term – they’ll prevail.
Like the legendary tortoise, whose slow and steady approach to the race beats the hare, investing long-term usually wins.
A 2017 survey from Fidelity Investments found that 88% of millionaires in the U.S. are self-made and most made their money from real estate and from starting and running businesses.
What separates the wealthy from Main Street investors is the wealthy invest their money strategically and methodically. Unlike speculators who aren’t certain about the outcome of their investments, the wealthy leave little to chance by sticking to certain fundamental principles.
What camp do you fall under? The short-term speculator camp or the long-term wealth builder camp?
If the recent pandemic-induced Wall Street volatility has taught us anything it’s that speculation can wreck portfolios and lives. Those in the speculator camp flee with their tails between their legs. They sideline their capital until they think it’s safe to go back in the water; but by then, they have a huge hole to dig out of. It’s an exhausting exercise in futility.
Avoid speculation by avoiding Wall Street.
Look to the private markets to invest with other like-minded investors with long-term investment windows – investors who don’t run at the first sign of danger.
Let your investments germinate and grow and ultimately pay you back in the form of cash flow and growth – both essential for building your wealth.
- Short-Term Investing Will Fail You.
- Don’t Speculate.
- Think Long-Term and Grow Rich.