On this episode of The Impatient Investor, Andrew asks if you are playing to win or if you are playing not to lose in your investment portfolio? If you want to grow your wealth then playing not to lose is a losing strategy, you need to play to win. Andrew explains how you can make this happen when investing.
“To play to win, you need to do things that will ensure your investment or investments will continue to produce to not only recoup your investment, but to grow your wealth.”
When it comes to investing, are you playing to win or playing not to lose? Perhaps the better question to lead with is, when it comes to investing, are you seeking to create and grow wealth or merely to preserve what you have? If you want to grow wealth, then playing not to lose for lack of a better term is a losing strategy, you need to play to win. And how does one win when investing? Benjamin Graham in his book, the intelligent investor said investing is most intelligent when is most businesslike. Let me say that again, investing is most intelligent when it’s most businesslike.
And to me that says treating an investment like a business is the intelligent and wise approach. This concept pretty much encapsulates Graham’s approach towards investing. Considered one of the fathers of value-investing Graham looked to the intrinsic value of an asset in his investment analysis. The essence of value investing is buying stocks at less than their intrinsic value. The intrinsic value is the discounted value of all future distributions. Only productive assets have intrinsic value since only productive assets are capable of providing distributions. An unproductive asset, like a great work of art does nothing and has no intrinsic value while you wait to sell it.
Back to Graham’s approach. If the stock price is less than the present value of all anticipated distributions from the investment, then the investment would be considered a bargain. Makes sense since this is exactly how a business owner would evaluate a business, how productive will the business be. In today’s dollar, what is the value of all anticipated productivity of that business? Is the value greater than my investment? If the business performs as anticipated, then my investment will be a winner.
According to Benjamin Graham’s model buying and holding is not a winning strategy. What business owner acquires an asset to only let it sit and hope at some future date, someone else will value it for more? That is not putting the asset to productive use, it’s speculating. The essence of value investing and of playing to win is that the asset should pay for itself over time, regardless of its future value at disposition. As you probably know by now, we are a huge proponent of value-investing and playing to win.
So here’s a great sports analogy. In the world of sports, it’s common for teams in the lead near the end of a game to shift strategies and abandon what had been working for it up to that point and adopt a more conservative approach to avoid the risk of losing the game. A football team will replace its aggressive, offensive game plan that gave it the lead in the first place for a more conservative ball protection approach, so it doesn’t lose the game.
As we’ve seen over and over this playing not to lose approach is a gamble and often ends in disaster, as it opens the door for the opponent to come back and win. In the world of investing, playing not to lose, playing defensively is merely to preserve an asset is also a gamble as the return on your investment is a hundred percent speculative and out of your control. You’re betting someone else will pay more for it in the future. You are doing nothing to control the outcome. That is the opposite of our approach. That’s why we invest in commercial real estate and we’ve been winning and have no intent on shifting strategies or taking our foot off the throttle.
You don’t have to wait 10 years and hope you make a profit. My opinion is unless a real estate asset is productive and providing consistent income. It is just like any other idle asset. One that just sits there where you hope it will appreciate with no guarantees. So play to win in the investing game, you have to keep your foot on the throttle and continually go on the offensive. To play to win, you need to do things that will ensure your investment or investments will continue to produce to not only recoup your investment, but to grow your wealth.
Then you need to take those profits and reinvest them to compound your returns. If you are a direct investor, this means continually nurturing and growing your business. If you are an investor in someone else’s venture, you need to invest for value and make sure it’s a productive asset providing regular distributions. Is the investment less than the present value of the future distributions? Then once you start receiving distributions playing to win means you reinvest these distributions into other income-producing assets. We love private investing alternative assets, and we believe that alternative investments offered the best opportunities for investing in a productive asset that provides consistent income while offering protection from recessions and economic downturns.
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