Grow Your Wealth Faster than a Billionaire

Good morning, Live Better than a Billionaire-a-Holics!

Are you feeling motivated this morning? I certainly hope so. I know that I am!

Introduction

When the best thinkers look at how to grow wealth, what do they focus on?

They recommend diversification, picking the right asset classes and avoiding frequent switches in position.

How do billionaires do with that advice?

The newest billionaires almost always create their wealth by creating a valuable public company. With most of their money held as stock in that company, they are usually undiversified, not in all the right asset classes, and are tempted to make frequent switches in position.

Billionaires with old money mainly focus on preserving wealth rather than growing it. That means being heavily invested in nonvolatile asset classes . . . which often grow the slowest.

How can you do better?

Observations

Most investment advice is backward looking. You assume that what has worked in the past will work in the future.

That is true sometimes . . . and not true at other times.

In the 1920s, Florida real estate was the asset class of choice in the United States. By 1929, this was the worst asset class in the United States until the stock market crash began in October. Following those "successful" paths would have been a quick road to bankruptcy.

A better approach is to be an informed, forward-looking contrarian as you pursue diversification, better asset classes and avoiding frequent shifts in position.

Look for asset classes that are the least expensive compared to the value they deliver and invest in the ones that should be about to do a lot better because conditions are more favorable.

Recommendations

Let's assume that you now have (or soon will have) money invested that you want to grow in value.

What should you consider doing?

1. Realize that it's better to be diversified into asset classes that will do well than in asset classes that will not do well.

Many financial advisors will now ask you what you want to use your money for and when. They will then use a computer program to assemble a portfolio of U.S. stocks and bonds that will minimize volatility over that time period and increase the likelihood of a gain . . . based on the average results in the past.

You probably shouldn't follow that advice.

Why? Stocks and bonds have had an amazing growth spurt in the United States since 1982. Compared to the outlook for inflation and interest rates, many believe that U.S. stocks and bonds won't do nearly as well in the future . . . perhaps even underperforming their averages. For instance, the S&P 500 has been pretty flat for some time now.

2. Understand that most financial advisors don't have the skill to help you spot asset classes that will do well in the future.

You have to do your own homework.

Start with what's cheap. If you like stocks, you will find the least expensive ones on a P/E basis in places like Brazil, South Korea and Singapore. If you like bonds, look at places where interest rates are sky high but inflation is coming down. When interest rates drop in those areas, the value of bonds will soar. Brazil is probably in this situation. Russia was in this situation.

Be sure it's safe. Many promising investments offer high potential returns because the risks are so great. Many people are skeptical, for instance, about recent trends in government interference in Russia. Owning private bonds there may not always work . . . particularly if the country seizes the company.

Look at the trends. You don't need me to tell you that the fastest growing areas in the world are those that have valuable natural resources that can be exported (like oil, iron ore, lumber and soybeans) or are cheap places to make things (like China).

Consider how the trends will interact. For instance, if oil reaches $100 a barrel, will China do as well? Brazil can also be an inexpensive place to make things, has lots of natural resources to export and can use its agricultural products to replace oil for gasoline. So perhaps Brazil is a better bet if all the trends continue.

3. Give yourself room for mistakes.

Many people build an investment based on one idea. Before investing, take that idea and make it less risky. In many cases, this means becoming diversified within an asset class.

For instance, when the stock market hasn't grown for many years, they will correctly perceive that venture capital investments will do better in the future.

That's because a lot of venture capital money is tied up in old deals that cannot be taken public yet. That also means that there's less money to go into new deals, so the price at which they are being offered is lower. Then, when those deals are ready to go to market in five years, the chances are that stock prices will be higher.

A plunger might buy a piece of a venture capital fund planning to make 15 investments. But if all 15 wash out, the plunger has only a tax deduction.

Those who want to avoid a mistake might instead invest in ten such funds, or in a single fund that will make 150 investments. That extra diversification will make all the difference.

4. Be smart and seek the average results of the asset class.

People love to pick a winner. They often don't mind picking 8 losers to get one winner. That's what keeps Las Vegas and the bookies in business.

Think about the math involved in investing for a minute. The average results in an asset class are achieved by less than 95% of all investors.

Why? They buy high and sell low, sell too often, and pick below average investments in an asset class.

Any time you can get a piece of so many individual assets so that you will mimic the asset class, you will beat 95% of the people. That's like always having a sure thing.

5. Hold on if your reasons for owning remain valid.

Transaction costs and taxes can eat up a lot of your gains. You'll also sleep better at night if you know why you own something and can see that those reasons are valid.

Be brutally honest with yourself and sell when that's not the case.

Many people today will tell you that you have to trade assets a lot to make any money. That's simply not true. It's just that the buy and hold strategy works best outside the U.S.

Here's why. The U.S. fiscal policies mean that the dollar will decline in value versus the price of imported raw materials (such as oil) and relative to the currencies of strong exporting nations. If you take your dollars and park them in attractive investments in all the usual asset classes in those countries, you will get a currency gain and a faster gain in the value of the assets. In many cases, the relevant holding period will be 5-10 years.

*******************************************************************

N.B. As you can tell, I'm experimenting with color. Let me know what you like and what I should change about my use of color. Many thanks to Linda Grace for her suggestions which I am following!

Please let me know what else you would like to learn, and I'll do my best to help in future blog entries.

Here are some upcoming subjects:

Tomorrow, we'll look at how to visit your relatives (including those you don't like) and have a ball!

Saturday, you'll find out ways to buy real estate better than a billionaire.

On Sunday, we'll look at the fascinating opportunities to attend on-line church services to improve your soul better than a billionaire.

Monday, I will share with you billionaire secrets for visiting mansions and seeing what most people miss.

On Tuesday, you and I will look at the best ways to party with the stars.

Wednesday, we'll look at new places to enjoy grand historic buildings.

Thursday, let's take a close look at the beauties and ironies of nature with Ansel Adams.

On Friday, we will look at better ways to enjoy outdoor living before the weather turns cold.

If you are new to this blog, be sure to check out the updated table of contents entry that I posted on September 21. It will help you find earlier entries that may be of interest. I'll update this table of contents every week or so for your convenience.

August 31 was the most frequently read blog entry to date. Be sure to check it out!

Thanks so much for your support of this blog. I'm delighted that so many tens of thousands of people have made this blog part of their regular reading habit!

If you like this blog, please let others know who might also enjoy it. E-mailing your favorite post to them is a great idea. My post on saving money on heating costs this winter is a good choice. You can find it at http://livebetterthanabillionaireon5dollars.blogspot.com/2005_08_30_livebetterthanabillionaireon5dollars_archive.html/.

Thank you to my many friends, students, clients and blog readers who are spreading the good word about this blog.

If you are visiting today because someone invited you, I'm delighted to meet you! Let's stay in touch.

Remember to check out

Live Spiritually Better than a Billionaire at http://livespirituallybetterthanabillionaire.blogspot.com/,

Be More Successful than a Billionaire at http://bemoresuccessfulthanabillionaire.blogspot.com/,

Enjoy Mansions Better than a Billionaire at http://enjoymansionsbetterthanabillionaire.blogspot.com/,

Enjoy Football Better than a Billionaire at http://enjoyfootballbetterthanabillionaire.blogspot.com/ and

Be a World Hero Better than a Billionaire at http://beaworldherobetterthanabillionaire.blogspot.com/.

I also offer individual on-line tutorials and in-person seminars on living better than a billionaire on five dollars extra a day, creating 2,000 percent solutions (20 times the results with the same effort), developing more profitable business models and designing strategies that work regardless of the business environment. For information, contact me at ultimatecompetitiveadvantage@yahoo.com.

May God bless you.

Donald W. Mitchell, Your Dream Concierge

Copyright 2005 Donald W. Mitchell