“ Being a substantial
investor is about an
approach to investing
rather than a benchmark
of one's net worth.”
When Americans think of substantial families, the Carnegies, Morgans, and Rockefellers may come to mind. But what is a substantial investor?
To be a substantial investor, you don't need to have that kind of net worth or pedigree. You just need to have the freedom to embrace a philosophy of seeing above the crowd and exercising patience. Being a substantial investor is about an approach to investing rather than a benchmark of one's net worth.
Substantial investors aren't subject to labels such as contrarian, bull, or bear. They are mentally flexible and seek opportunities wherever they may lie.
If an asset class is hot, the crowd will pay any price for it with the simple justification: "this time it's different." A substantial investor knows better. Eventually, assets that make euphoric moves up make stomach-churning moves down. When that happens, substantial investors who have remained patient will be positioned to divert capital and buy great assets at opportunistic times.
Unpredictable events occur often enough that they are not rare:
| 2005 - | REFCO, the world's largest non-banking futures merchant, files for bankruptcy just two months after Initial Public Offering (IPO). |
| 2002 - | NASDAQ crashes 80 percent from its 2000 high. |
| 1999 - | WorldCom reaches a market cap of $125 billion, but later collapses under massive fraud. |
| 1998 - | Asian financial crises: Hong Kong, Singapore, Malaysia and many markets in the region fall by as much as 75 percent from their 1997 highs. |
| 1994 - | US bond market plummets: Orange County, California defaults on loans and files for bankruptcy. |
No one knows when, where, or how the next catastrophic event will unfold. But substantial investors know one thing for sure: it is a mathematical certainty that to recoup any size of loss will take an even greater gain. For example, a 50 percent loss will require a gain of 100 percent just to get back to even.
The Catastrophic Loss cripples not only the compounding process, but also the investor's spirit. Therefore, the key to managing money over an extended period of time is to manage risk and manage psychology.
Substantial investors are skeptical by nature and respect risk. They have a willingness to embrace a wide variety of asset classes and strategies that are often overlooked or misunderstood by the masses. They are better prepared for an extreme event or market dislocation.
Financial firms like to propagate the notion that prosperous people should do what they do best and outsource everything else. Unfortunately, outsourcing the management of your money is not quite the same as outsourcing the upkeep of the grounds or decoration of the summer house. It requires vigilant oversight and active participation. Simply put: no one, but no one, is going to care about your money as much as you do.
Perhaps you already share my investment philosophy and want an additional source of quality ideas. Or you may find this newsletter to be a valuable complement to your own thinking. In either case, we invite you to join us in our quest to consistently compound capital.
Photos of J.P. Morgan and Andrew Carnegie courtesy of the Library of Congress, Prints & Photographs Division, [reproduction numbers LC-USZ62-90762 Carnegie & LC-USZ62-94188 Morgan].
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