10 Surefire Ways To Make An Investment Fortune, Part II

Below, I present Part II of my original article, "10 Surefire Ways to Make an Investment Fortune."

(6)Understand Why You Own Everything You Own, Then Stand Firm in Your Convictions

Since most people never take the time to learn how to invest properly, or are fed a bunch of misinformation by the so-called industry professionals, they waffle as much as a shady politician when making investment decisions. They don’t know if they should hold, sell or buy during corrections, or hold or sell during steep runs higher. Primarily they don’t know because they don’t understand what they own because they have allowed someone else to make those decisions. I’ve always found it odd how people will refuse to allow other people to do the most trivial of things for their companies, preferring to take care of them him or herself, or will consult 20 people before buying a car, but will gladly hand over $2 million in cash to a stranger to manage.

Yet, just having conviction is not enough. Being wrong in your convictions can be just as devastating to your portfolio performance than having no conviction at all. For example, in June, July, and August of 2007, many housing analysts repeatedly called bottoms in housing stocks, and many investors, just like sheep, jumped in and bought up shares in housing related stocks. Some even kept increasing position in shares of sub-prime mortgage companies that had plummeted 70% believing they were acquiring the stock for pennies on the dollar. Most of these investors, instead of profiting, lost a great deal of money from stocks that did not stop hemorrhaging and some lost 100% of their money from investing in companies that eventually went bankrupt. This is the lazy man or woman’s way out and almost never ends up well.

When I say “Stand Firm in Your Conviction”, do so only after gaining expertise in a subject matter. Do not blindly follow someone else’s advice just because they appear on Bloomberg, the Wall Street Journal or Reuters. Just because someone has the appearance of an “authority” does not make him or her one. In fact, often there are shameless self-promotion reasons behind media appearances and the only person that is bound to get hurt by blindly listening to these people is you. Only after you take the time to truly learn everything you need to know to become an expert in a particular industry or asset class, then don’t be afraid of going against the grain of the majority opinion. You’ve taken the time to become an expert, so utilize your knowledge in how you manage your portfolio. More times than not, you will be correct when everyone else is wrong.

(7)Make Volatility Your Friend

Most people have been taught that volatility equals risk. Baloney. If you remember that market timing in asset class cycles is possible, then you can basically negate much of the risk of volatility by buying close to the troughs instead of close to the peaks. Furthermore, you can never make any money by buying a bunch of stocks that plod along at 6% to 10% growth a year. Thus, you need volatility in your portfolio in order to make money. In fact, I advocate even owning some speculative stocks to boost the performance of your portfolio. Again, with due diligence, a fair batting average with speculative stocks is not only feasible but very likely. I’ve only been able to obtain 25% to 35% annual gains in stock portfolios by devoting a percentage of my portfolio to speculative stocks that have returned 280%, 260% and 190% a year. At the end of the day I don’t care if I have some speculative stocks that go belly up (meaning they got stopped out at 40% losses) if I have enough stocks that earn several hundred percent that significantly add to the absolute return of my portfolio. Like I said, make volatility your friend.

(8)Never Listen to the Government

Government statistics do move the market. But that doesn’t make the statistics right or truthful. The Consumer Price Index, Housing Starts, Job Growth, the Consumer Confidence Index, and so on all influence the markets. Markets always await with bated breath for the release of these numbers, then are accordingly swayed higher or lower depending upon whether the reported numbers miss or exceed analysts’ targets. Knowing that these government statistics affect market movements, why would I say disregard them? Here’s the answer.

Rarely are these statistics every forthcoming and aboveboard. Instead they are manufactured to sway markets to react in certain ways. For example, the formula to determine the CPI in the U.S. was tinkered with greatly under President Clinton. Current U.S. Federal Reserve Chairman Ben Bernanke has been reported to be tinkering with the formula even more. If the CPI formula used 15 years ago would report a drastically different number than the CPI formula used today simple due to significant differences in how the CPI is now calculated, how much confidence doest that grant you in the validity of this statistic? Other major benchmark government statistics aren’t even based upon real surveys of actual transactions, but rely heavily on government estimates. Thus, the government just estimates the statistic to be whatever they want it to be so that it will serve their purposes and will steer the economy and the stock markets in the desired direction.

This is why when stock markets turn abruptly and experience sharp corrections, everyone states, “we never saw it coming”. Disregard government statistics, do your own digging to understand the true economic conditions of whatever market you are planning to invest in, and you’ll never suffer destruction of wealth due to unforeseen surprises. Instead, you’ll see the surprises coming from miles away. Especially today (September 2007), with an imminent global economic crisis on the way, it is especially important to disregard the government and prepare accordingly. If you do, you’ll make a fortune while your neighbors will be rocked by “shocking” and “surprise” downturns in stock markets.

(9)Follow the Money Trail

As a means of validation, but certainly not as a primary strategy, occasionally dig down deep and see where the elite money in your country is heading. For example, in early 2006, you would have discovered that Bill Gates and George Soros were shorting the dollar tremendously, a good sign to get rid of any dollars you had and to diversify into Euros, Sterling and gold. With gold mining companies, if you discover that the best, most successful companies in the industry are buying 3 million shares of a speculative stock, well, basically you know that the best minds in the business would never just dump millions into a stock without performing their due diligence. So if your own personal due diligence tells you the stock is a buy, then certainly the discovery of this additional information is reassuring.

However, the number one rule, Rule (6), is always to understand what you own. Thus, you can’t just look at the equity portfolio of Warren Buffet and think that you can duplicate his returns without understanding why you would buy the same stocks he holds. If you don’t understand, you won’t know whether to buy more, sell everything, or hold on to your current position during market downturns and what to do during strong runs higher. If you don’t understand this, you just can’t make money.

(10) Expand Your Investment Horizons Across Global Borders

Too many investors suffer from myopia. They think that if the markets in their country are bad, that they must suffer losses as well too. Often, one market may be down in one region of the world but soaring in another. Broaden your investment borders and you greatly increase your chances of being highly profitable every year. Sometimes, you won’t even have to look outside your country, but just look where no one else is looking. When one of the major indexes in the U.S., the S&P 500 shed 49% of its value from 200-2003, there was another little followed index in the same country that gained 58% during this time. But it was ignored, un-researched, and I doubt if more than 1% of all investors in America benefited from the tremendous run of this asset class.

One last word. All the rules above demand a certain level of creativity. Before I employed the 10 rules above five years ago, I never made much more than 10% a year when investing in stocks. After I started employing the rules above, 20% annual returns a year started seeming like poor returns. Realize that investing is not a science, but an art. All the number crunching, fundamental analysis, and technical analysis in the world will not provide you with better returns than simply being creative with the 10 rules above. So change not only your investment life today with the application of the above rules, but forever change your beliefs about the types of investment returns that are possible and achievable.