Okay. You want to be a super-successful investor. I get it.

You are already living on a fixed income. Or you are nearing retirement and worrying about whether you’ll be able to kick back and earn a passive living from your investments. I’ve been there. I’ve retired three times. I know how you feel.

But here’s the thing. The secret to lifelong financial security is this: Never give up your active income. Keep a controlling stake in your business or start a side business that will pay you dividends till the day you die. That is the only serious financial security you can ever have. There is nothing you can do passively that compares to it.

But no more on that subject in this essay — I know how middle-aged investors think. They don’t want to be told they have to keep working. They’ve been working their whole lives. They want easy solutions. Big returns. And they don’t want to make all the tough decisions themselves, like they’d have to do with a business.

In short, they want a guru. I’m not a financial guru. In fact, I know very little about the technicalities of investing. But I have done very well with my investments these last 30 years. So today I’m going to tell you most of the important things I know. What you are about to read are “truths” I’ve discovered from my experience.

I might not be able to give you everything you really want — triple-figure returns guaranteed. But I’ll give you the next best thing: the system I followed that kept me out of every major financial collapse in my lifetime and made me very wealthy without spending four to eight hours a day studying the markets.

One thing I bring to the table is long-term perspective. I said I’ve been investing for 30 years. That’s true. My first investment, a speculative bid on a Washington D.C. condo, was in 1980. I lost all my capital and more. And it changed me. I became very skeptical of going after huge returns. That is why I never got suckered into all the bubbles that have taken place since then.

Another thing I bring to the table is a long-term perspective. I’ve been an insider in the investment advisory business for about as long as I’ve been investing. I know all the gurus. Hell, I know their fathers. I know their games. I know how they make money when they make money. And I know how they hide their losses when they lose, which is often.

Today, I’m going to give you the straight dope on how I invest. It’s all about not being an idiot. It’s all about sticking to the basics. It’s not difficult. In fact, it’s easy.

If this doesn’t sound like too much braggadocio to you, read on.

Successful investing has three elements:

1. How much you have to invest

2. How long you keep it invested

3. The rate of return you can get

All other things being equal, the more money you have to invest, the easier it is to get rich.

It’s also much easier if you have time on your side. It’s easier, for example, for an 18-year-old with $5,000 in his bank account to acquire a multimillion-dollar fortune than it is for a 65-year-old with $1 million in net assets. When you have more time, you can take less risk and let the miracle of compound interest work in your favor.

If you are young, I recommend my book Automatic Wealth for Grads. It provides a blueprint for wealth that anybody, and I mean anybody, can follow. But you aren’t 18, are you? You don’t have that much time. And that is where the third element of successful investing — rate of return — comes into play.

You’ve done the arithmetic and you realize that the only possible way for you to acquire any sort of respectable retirement fund is to get triple-digit returns on your investments.

But let me tell you something about triple-digit returns. They happen. They happen all the time. But they don’t happen to me all the time. And they probably won’t happen to you. Triple-digit returns are like eagles in golf. There are hundreds, if not thousands, of eagles every day around the world. But even the best golfers don’t experience them very often.

Making money in the markets is much like golf: every time you tee off you should be looking to shoot below par (i.e., above market), but to be a great player you can’t  try for a hole-in-one on every par three or try to get on in two on every par five. You need to play the game strategically because you know that odds are the eagles will not come that often.

My investment strategy has always been based on the fact that I know I am not destined to get triple-digit returns with any frequency. Still, I’ve done very well.

So how much do you have to invest? $10 million? $1 million? $100,000? $10,000?

If you have $10 million, you don’t need to worry about triple-digit returns. You can achieve financial independence by making 5 percent on your money. The secret to successful investing when you have that kind of dough is to restrain your greed and curtail your expenses. You can live like a billionaire for about $100,000 a year. $10 million at 5 percent gives you an income of $500,000 a year — way more than you need.

If you have a million to invest, you need more than 5 percent. If you buy my $100,000 figure (and in a future essay, I’ll show you how that can be done), you will need to get a 10 percent rate of return. That’s not so difficult. I know many investment advisory services that consistently deliver 10+ percent returns to their readers.

If you have less than a million to invest, you have a challenge. You need to get high returns on your money. By high, I mean 15 percent, 25 percent, and the occasional triple-bagger.

But high returns usually mean high risk. And high-risk investing — for most individual investors — means the possibility of losing most or all of your money.

All the investment research I’ve ever read has proven that if you invest exclusively in high-return/high-risk investments, you will eventually go broke.

Can you deal with that? If not, you need to have a secondary supplemental income from an active interest in a business. But I told you I wouldn’t talk about that today. Today, my job is to show you how to make above-average market returns on the measly money you have saved for your retirement.

But to do that, I have to define the word “save.”

The Difference Between Saving and Investing

Most people think of saving and investing as synonymous. That is a big mistake.

As Porter Stanberry (founder of one of the investment advisory services I mentioned above) recently explained at a dinner party he gave in his multimillion-dollar Miami winter home, investing is what you do to grow your wealth. Saving is what you do to preserve it.

I have always divided my assets into the following four categories:

  • Private property (homes, art, other valuables)
  • Active investments (businesses I own or control)
  • Passive investments (stocks, bonds, etc.)
  • Savings (stored, safe wealth)

Private property can have significant financial value, but since you are using it (and want to continue to use it while you are living), it cannot be considered an investment.

Active investments, as I’ve pointed out, are great investments so long as you stay active with them. But I agreed I wouldn’t keep pushing these, so we’ll put them aside for now.

Passive investments are the things you normally think about when you talk about investing. But passive investment is risky. You don’t want to take a risk with your savings. That’s why I (and Porter) don’t consider passive investing to be a form of saving.

Saving, as Porter explained to his dinner guests, is the money you put aside every year after you’ve bought the private property you want and have made the investments you want. Saving is what you want to keep.

In the past, I have put my savings into four vehicles: cash, bonds, rental real estate, and gold.

But these days, I think that bonds are very risky. I still invest in them, but I don’t consider them to be savings. Cash gives me near zero return, so keeping money in cash is no longer an option since inflation will cause it to diminish — just the thing I don’t want to happen to my savings. I got out of rental real estate about five years ago when it was obvious I couldn’t get a safe return on my money. I’m back into it now, but (as I’ve said in past ETR essays), cautiously.

But rental real estate is not a passive investment. It is active. The only way you can assure a good return is to own and manage your properties carefully. In that regard, it’s like running a business. It’s not as difficult as most businesses, but it’s still very hands-on.

Among passive investments, Porter says the only current option is gold.

I think he’s right. Gold has retained its value for thousands of years. Against inflation. Against war. Against a disintegrating currency (like the dollar). Gold holds its own. You can’t do better than gold for your savings. I have subscribed to this philosophy since gold was priced at $300. I have enough gold coins tucked away to support me and my family for the rest of our lives.

As I said, if you have less than a million dollars to invest, you have to be willing to take some risk to make the kind of returns you need to enjoy a decent retirement.

So, aside from gold, where should you put your money?

Getting Your 15 Percent to 25 Percent and Occasional Triple-Bagger

It’s not easy to get 15 percent to 25 percent on passive investments. Studies show that it’s nearly impossible. But I know guys who have done it. And I’ve been watching them do it for decades. They have secrets — little tricks of the trade — that I can share with you.

First, and most important, they don’t keep all their eggs in one basket. They diversify.

I have always favored that approach. And because I didn’t want to be bothered looking at individual stocks, the money I had in the stock market was invested in index funds. But today, I don’t think that makes sense. The stock market is overvalued. One of these days, it’s going to take a big hit. If I had all my stock money in index funds, I’d take that big hit with them.

I still believe in diversifying. But now I think it makes more sense to do it by finding sectors and individual stocks that seem likely to outperform the market. That means I’m going to have to get “active” with my passive investments.

Having a bird’s eye view of the investment advisory business, it is clear to me that some advisors have been doing very well. And some of them did well even in 2008 and the beginning of 2009, when everyone was getting killed. I know many of these people personally. So I will be picking and choosing from their recommendations.

But I don’t intend to simply pick a few gurus with great performance records and blindly do what they tell me. I will educate myself on their investment ideas and strategies and use that knowledge to make decisions that match my temperament and my financial objectives.

You have to be in charge of your own portfolio. And part of being on charge of your portfolio is not to let your emotions get in your way.

Greed and fear are two of the emotions I’m talking about. Greed will make you buy bad stocks, simply because you are convinced their prices will go up. Fear will prevent you from buying good stocks because you are scared of the market or a market sector or something else.

Insecurity is another one. Insecurity makes it difficult for an investor to admit that he was wrong about a stock he put his money into. Not admitting you were wrong means not selling a bad stock when it’s going down. Many investors never sell their stocks, even when they are left with pennies on the dollar. A healthy attitude is one that says, “Although I invested in a particular stock in good faith, I’ll never know enough about the stock or the market to be 100 percent right all of the time. When the market causes the price of one of my stocks to come down, that is just its way of telling me that I didn’t have all the facts.”

How to Make Smart Investment Decisions

When I look back on my investing career, I’m almost shocked at how well I’ve done. After my first bad experience investing in the Washington, D.C. condo, I became a chicken investor (just like I am a chicken entrepreneur). So I never expected to make high returns. As I said in past essays on the subject, I was more than happy to make average ROIs.

I’ve always followed a simple rule: Before putting money in a passive investment, I apply the same criteria that I apply to buying a business:

  • I never buy a business I don’t understand.
  • I never buy a business whose management seems the least bit shifty to me. If I have doubts, I stay away.
  • I never buy a business that isn’t making money unless I can clearly see how it could make money if I added something to it that I have.

What’s Interesting Right Now

Since realizing that I have to get “active” with my passive investments, I’ve been keeping an eye on the predictions pundits are making for various market sectors. Much of it seems just plain dumb to me. But some of it I find very convincing. For example:

  • Uranium. IDE Investment Director Bob Irish has convinced me that uranium is a good bet. As he says, “It’s not a matter of if, but when.” Uranium exploration and production is making some headway, but not nearly enough to keep up with the 70 nuclear plants being built now. And many more are in the planning stages.
  • Natural gas demand is set to increase significantly, and select companies will profit handsome.
  • The world’s population continues to increase, along with the demand for agricultural products. The standard of living in developing nations is rising — and that, say the guys at IDE, will push food prices even higher. They’ve convinced me that there will be plenty of opportunities to profit by investing in raw food commodities and the fertilizer producers.
  • I stopped investing in gold when it hit $1,000 an ounce. (I got in around $350.) But there is a great deal of solid evidence that suggests that gold could surpass its average annual gain of 16 percent over the last decade. I’m expecting it to hit $1,500 at some point in the next year or two. So I’m back to gold.
  • Commodity prices will head higher because of increasing demand and the prospect of higher inflation.
  • I have always liked investing in businesses that appeal to Baby Boomers. (I’ve written a good deal about this in the past.) Baby boomers have been driving the U.S. markets since the early 1950s. I don’t see any reason for this to change until they (we) are dead.
  • Healthcare. (See my thoughts on Baby Boomers.)
  • And finally, I’m looking at oil. I’ve seen one very persuasive report that argues that oil prices will top $100 a barrel in 2010.

These are trends I believe in. As a businessman, I’ve made all of my big money getting into trends as they are taking off and then getting out when they are clearly overvalued. If you look at the miserable history of professional trend investors, you’d think this was a crazy strategy to pursue. But most of these guys lost money because they got in too late or stayed too long. I don’t think that is at all necessary if you are prudent (i.e., if you are a chicken investor.)

In the next essay I write on this subject, I’ll explain why I think that is. I’ll tell you when I get in and when I get out and what indicators I use to make those decisions. Nothing I do is complicated. It’s just a matter of applying basic business rules to investing.

[Ed. Note: Mark Morgan Ford was the creator of Early To Rise. In 2011, Mark retired from ETR and now writes the Palm Beach Letter. His advice, in our opinion, continues to get better and better with every essay, particularly in the controversial ones we have shared today. We encourage you to read everything you can that has been written by Mark.]

Mark Morgan Ford

Mark Morgan Ford was the creator of Early To Rise. In 2011, Mark retired from ETR and now writes the Wealth Builders Club. His advice, in our opinion, continues to get better and better with every essay, particularly in the controversial ones we have shared today. We encourage you to read everything you can that has been written by Mark.

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