Wednesday, April 16, 2014

Daring To Be Great

Sometimes I come across articles in the finance and business world that cause me to think about how they apply to my own personal life. I decided to share some of those thoughts here today after reading Howard Marks' most recent investment letter "Dare To Be Great: Part Two," which was a follow up to the original article he wrote back in 2006. It may be helpful to read the memo before reading the thoughts it triggered regarding my life.

The thought process behind "daring to be great" is an excellent way to sum up the investment world. If you invest in index and mutual finds that track the general market you will find yourself in the general herd that is on auto-pilot. Sometimes that is great (such as being heavily weighted in U.S. stock funds during 2012 through 2013). Over half my readers live outside the United States so it is probably unlikely they would find themselves in that category. The U.S. herd just happened to be in the right place at the right time (similar to the late 1990's). 

The same goes on the downside. When the markets crashed in 2008 it impacted almost everyone, even the rich. I have discussed this in the past, but studies show that this loss of wealth was easier for Americans to endure knowing that everyone around them was also in pain. The human mind is a herding machine, constantly looking to enter into or stay within a flock. While you could write a book extrapolating what that means for markets, in short, it is a large part of the reason behind the current boom and bust cycle markets have entered since about 1995. 

The idea of "daring to be great" can extend beyond the world of investing as well. The general herding system currently in place around the world goes something like this; go to school and get a good job with benefits. That sums it up. I don't mean for the word "herd" to be seen in a negative context. I will discuss in a moment why it is usually the healthiest and happiest place to exist.

I would describe my day to day business life as existing outside of the herd. My business time is focused on two relatively simple goals that when actually put in motion become more complex:

Goal 1. Become a better entrepreneur. Develop the skills needed to build a strong business.

Why?  I believe that sometimes in life there are rewards for moving in the opposite direction of everyone else. With 99% of people looking for jobs instead of starting their own companies, I believe the government will continue to provide incentives to business owners who create jobs in the future (specifically tax incentives). 

There are many additional reasons, including the ability to grow wealth exponentially vs. the potential ceiling involved with working for a company. I believe this will become more visibly relevant in the future as people realize they are battling central banks that are removing purchasing power from under their feet. 

I also enjoy the freedom to make my own hours vs. being told to work X:00 to X:00 no matter the circumstance. I usually work about 10 hours a day so it is not that I am lazy, I just want the ability to go for a run in the afternoon if I need a break. This keeps me at the highest state of productivity. I also like the ability to turn off in the afternoon if I've already put in a 12 hour day (I usually get started around 4:00 AM, including weekends). 

How am I working toward accomplishing goal number 1? I started my own company three years ago (a company I will discuss in detail in the future). As with everything in life, the best way to learn something is by doing it. See the learning pyramid below. The only better way is to teach someone. This cone is a large part of the reason I created this site (see "teach others" at the bottom). I probably take in over a hundred hours worth of information on the financial markets every month through audio and reading, and I found that by putting my thoughts down on this website it allowed me to retain the information at an exponentially greater level.


Goal 2. Become a better commercial real estate investor. Develop the skills needed to locate undervalued properties, obtain financing and successfully manage them. 

Why? I believe that at some point during the next 15 years we will experience another major real estate price decline, which will represent the greatest buying opportunity of our lifetimes. This will not only occur in the United States, but in major cities and countries around the world.

Real estate provides investors with leverage, tax incentives and control. It is the most difficult investment to master (stocks, bonds, commodities and currencies have little management), but the rewards are the greatest, by far. 

How I am working to accomplish goal number 2? I spent two years managing a large commercial real estate property. I spent over a year at one of the largest commercial real estate finance companies in the world to become fluent in that spectrum. I am currently working and learning in the acquisition part of the industry. As with the goal number 1, I am learning by doing. 

In Howard Marks' letter below he includes a quadrant with four possible outcomes. On the left side you have conventional behavior where the two possible outcomes are "average good results" and "average bad results." As discussed above, it makes people far more comfortable psychologically to exist within this sphere.

On the right side of the quadrant you have unconventional behavior where the two possible outcomes are "above average results" or "below average results." As Marks describes:

For years I’ve posed the following riddle: Suppose I hire you as a portfolio manager and we agree you will get no compensation next year if your return is in the bottom nine deciles of the investor universe but $10 million if you’re in the top decile. What’s the first thing you have to do – the absolute prerequisite – in order to have a chance at the big money? No one has ever answered it right.
The answer may not be obvious, but it’s imperative: you have to assemble a portfolio that’s different from those held by most other investors. If your portfolio looks like everyone else’s, you may do well, or you may do poorly, but you can’t do different. And being different is absolutely essential if you want a chance at being superior.

Sounds easy right? Just living your life on the right side of the quadrant provides you the opportunity for exceptional returns both in finance and in your business life. However, there are consequences to living this way, both in investing and working, which are just as important to discuss.

Below average returns means you may watch the stock market run away from you if you made what was the fundamentally correct choice by not participating in an overvalued market. This example is easy to demonstrate because it occurred with anyone who watched the U.S. stock market from the sidelines over the last two years. Those non-herd people then attended dinner parties where everyone discussed how magnificent their 401k's were performing. 

On the business side, if you spend 5 years building your own business and the business fails, not only have you lost the capital you put into the business, you have lost the capital you could have earned working at a company earning safe money. This is equally devastating to handle. 

Another drawback or warning I would give to someone who is thinking about moving outside the herd is that it is difficult to turn it off. When most people leave a job at 5:00 they are mentally finished working for the day.

My business/investing mind never turns off. When I finish working 12 hour days I often move on to a book on global finance. When I'm not working, my mind is thinking about ways to grow my business, the loan package for a 400 unit apartment community in Nashville, or how the yen is trading after hours. This is not easy for my wife, and it's a constant battle to try and turn off and be a somewhat normal person.

Why am I telling you all this?

If you are thinking about going out on a limb and leaving the herd in either your portfolio or business life, make sure you understand both the upside and downside to doing so. I would not change my lifestyle for anything in the world, and I am fortunate that I have an amazing wife who can put up with me. However, there are times when I look at my more normal friends and wish I could exist in their mindset for a week.

Mark Cuban describes the business and investing world as a 24 hour, 7 day a week sports arena which never turns off. I couldn't agree more. Unlike normal sports, the business world does not expire at a certain age. I completely understand why 75 year old multi-millionaires put in longer hours than 25 year old employees. It becomes a drug. You probably noticed that my goals above do not have a finishing point. That is because I hope to be just as excited about becoming a better entrepreneur and real estate investor when I am 70 as I am today (and writing about it here).

That being said, here is Howard Marks' perspective on "daring to be great." 

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