The first law of nature is the same as the first rule of investing. Here’s why… [Wednesdays: The Independent Investor]
Miles Everson’s Business Builder Daily speaks to the heart of what great marketers, business leaders, and other professionals need to succeed in advertising, communications, managing their investments, career strategy, and more.
A Note from Miles Everson:
Welcome to today’s edition of “The Independent Investor!”
Every Wednesday, we publish articles related to investing. Our goal is to help you strategically think about your financial choices through the tips and insights that we share.
Today, we’ll focus on a coaching comment my friend and colleague, Professor Joel Litman, delivered to his workforce at Valens Research.
Curious to know what this coaching comment is all about?
Keep reading below.
The Independent Investor
Are you familiar with the first law of nature?
This means all living things naturally prioritize their own survival above all else and will do what is necessary to stay alive, even if it is to the detriment of others sometimes.
According to Professor Joel Litman, Chairman and CEO of Valens Research and Chief Investment Strategist of Altimetry Financial Research, selfishness is a natural behavior among human beings. Whether we’re working or retired, many of us go through our everyday lives trying to get or gain instead of to give.
Here’s an interesting fact: Did you know the first law of nature is exactly the same as the first rule of investing?
When you think of self-preservation in terms of your wealth, you’ll likely think of your tendency to shy away from losses. This concept reflects billionaire investor Warren Buffett’s rules of investing, which include:
- Rule #1: Never lose money.
- Rule #2: Never forget rule #1.
These rules imply capital preservation is the most important thing you can do as an investor. This is the first law of nature in the financial markets.
So, how can you best preserve your capital?
If you take the idea of capital preservation literally, you’d be focused on the short term. This means you’d leave all your money in volatility hedges like savings accounts or gold. If you’re even more cautious, you’d want to simply hide your money under your bed.
Here’s the rationale behind this: If you only think about the immediate future, these short-term asset classes can be tempting. Since they’re shielded from market “noise,” they are considered less volatile and “safer.”
The problem is, dumping your cash in these assets is a surefire way to lose over the long term. After all, U.S. equities have outperformed all of these “safer” asset classes over time.
This is an example of how a wrong idea of capital preservation can turn into short-term selfishness. Here, you want to make sure you have all the money you need now. What you don’t realize is you’re actually stealing money from your future self.
Here’s what Professor Litman says:
“If you want to be long-term successful, you have to be long-term selfish. Your daily investing choices should focus on how you’ll benefit down the line.”
What does Professor Litman mean by this?
As an investor, you have to learn to ignore the day-to-day market volatility.
Your investing decisions shouldn’t be based on whether the stock market will go up or down tomorrow. Additionally, you shouldn’t pay attention to how such moves might make you feel.
You only have to remember this: If you want to do well in the future, stocks are the right place to put your money into… even if today’s economic environment is hard to stomach.
Always keep in mind that in the long run, a nearsighted investment approach will only result in the very opposite of capital preservation: LOSSES.
Cash, golds, and bonds all tend to underperform equities. Over time, you’re not making much more than inflation in these asset classes… and before you know it, you’ll see you’re already far behind and you’ve lost money.
So, as you continue to move forward this year, take note of the first law of nature. Your sense of self-preservation—both personally and financially—should be rooted in the long term.
In terms of your wealth, know that your short-term decisions won’t do much good for you and your family in the end. After all, the U.S. stock market has shown resilience through the years, and it’s full of amazing, growing businesses.
That’s where you should focus your investments.
Consider and apply this insight in your personal investment approach!
P.S. Remember to join Professor Litman on May 10, 2023, at 8:00 PM EST. He will discuss this new economic risk that could cost some investors up to 90% of their portfolios in a matter of weeks and outline what investors should do to protect their investments and get ahead of this risk.
Joel is one of the people you can count on when they issue a warning like this.
You may register for the event below:
We hope you can join!
(This article is from The Business Builder Daily, a newsletter by The I Institute in collaboration with MBO Partners.)
About The Dynamic Marketing Communiqué’s
“Wednesdays: The Independent Investor”
To best understand a firm, it makes sense to know its underlying earning power.
In two of the greatest books ever written on investing, the “Intelligent Investor” by Benjamin Graham and “Security Analysis” by David Dodd and Benjamin Graham (yes, Graham authored both of these books), the term “earning power” is mentioned hundreds of times.
Despite that, it’s surprising how earning power is mentioned seldomly in literature on business strategy. If the goal of a business is wealth creation, then the performance metrics must include the earning power concept.
Every Wednesday, we’ll publish investing tips and insights in accordance with the practices of some of the world’s greatest investors.
We make certain that these articles help you identify and separate the best companies from the worst, and develop your investing prowess in the long run.
To help you get on that path towards the greatest value creation in investing.
Hope you’ve found this week’s insights interesting and helpful.
Stay tuned for next Wednesday’s “The Independent Investor!”
Head of Marketing
Valens Dynamic Marketing Capabilities
Powered by Valens Research