“Every man gotta right to decide his own destiny.”
I recently read a blog post by venture capitalist Fred Wilson about how they focus on the company that they invest in, not necessarily the investment. One sentence really stuck out to me:
Venture capital is one of those asset classes where you can impact your investment.
I think that the allure of investing in individual stocks and actively trading in the stock market is actually an offshoot of Wilson’s quotation.
If you’re trying to shoot for the moon with an investment, what do you do? You research the stock. You watch CNBC. You read forums. You pore over filings. You might even listen to earnings conference calls. You may even ask a friend or someone you trust about the investment to validate your “investment hypothesis” (even though selection bias will almost certainly persuade you not to listen to someone who tells you that the investment is a bad idea).
After doing all of that research, and perhaps scattering a few chicken bones or consulting with an astrologer, you decide to take the plunge and make your investment.
You watch the stock price like a hawk, hoping that it goes up and up and up.
But can you actually do anything about your investment aside from set the price at which you would buy and the price at which you would sell?
Sure, you can place proxy votes. You could even go to a shareholder meeting.
But can you personally reduce costs or increase sales?
Almost assuredly no.
Why does someone go through all of that effort when once they have made the investment, they have zero ability to impact it and, generally speaking, they will underperform the market?
Illusion of control.
We love to tell ourselves that we can control the outcomes of our investments, even if we really cannot. Hence, we go through the gyrations to create a narrative that we can tell ourselves about what great investors we are.
So, if we cannot influence our investments in the stock market, are there investments where we can influence the outcome?
Investments Where You Can Influence the Outcome
Yes. Otherwise, I wouldn’t write this article, would I?
I think that there are at least five categories (and you, Dear Reader, may come up with more…share your thoughts in the comments in the bottom!) where you can control the outcome of your investment, although I suspect that some of you will think that one category may stretch the definition of the term investment, which is…
Investing in paying down your debt
This is particularly true for those of you who have credit card debt. You know the interest rate of your loan, so, therefore, you know the rate of return that you will receive if you invest in paying off that debt. It’s a guaranteed rate of return, and it’s almost certainly higher than you can receive if you put that money in a CD or money market account.
Getting your employer match in your 401k/403b account
Again, this is an investment with a known return. Let’s say that you make $50,000 per year and currently contribute 2% to your 401k. Your employer offers a match of 50% of the first 6% that you set aside from your salary into your 401k plan.
That means you’re leaving $1,000 on the table. $1,000 that is right there for the taking, and you’re letting your employer keep it.
Now, what happens to that $1,000 after you receive it is anyone’s guess. But, if I’m going to put money in the market to try to save for retirement, I’d be thrilled to use some house money to do so.
Investing in your education
As we saw in “Should I Quit Work to Go to Graduate School?”, investing in quality higher education has a positive expected value.
However, you can certainly control the biggest variables that affect the outcome of that investment:
- Your GPA: study your butt off. Work with professors. Write papers early and turn them in as drafts for review. Do every extra credit activity you can. Get as high of a GPA as possible.
- Network while in school for your next employer: Flaunt that sick high GPA around and become a known commodity to those employers who are hiring. Work to get a great internship at a fantastic (and well paying) employer, and then…
- Crush your internship: Go above and beyond. Come up with 10 new ideas every day a la James Altucher and bring them into work. Take people out to lunch so you can pick their brains and get their feedback. Make everyone around you look good and smart. Make yourself indispensable.
Investments in real estate
The old saying goes that you make your money on the purchase in real estate. Certainly, this is true. You don’t want to buy the nicest house in the neighborhood as an investment property. You want to buy from distressed buyers who need to get out from underneath their mortgages and will take quarters and half dollars on the dollar to alleviate their situations.
However, a real estate investment includes more than just buying well.
- Make wise decisions about the upgrades and renovations that you make. If you’re buying a property that you plan to rent out, then you don’t need to install granite countertops unless you’re renting in a high end neighborhood. Make the kitchens functional and the floors nicer than contractor grade carpet (we use LVT), and you can get a premium to the market for your rent, but you still need to…
- Be diligent about screening your renters. You are not required to rent to anyone as long as you’re not discriminatory in who you reject. Therefore, set a high standard when screening renters with regard to credit, payment history, and, most importantly, income stability. The longer a good renter stays with you, the better. My ideal renter is the person who will stay in my house until they pass away, and then their kids will move in!
- Pay in cash. Mathematically, this might not be the best choice, as you can use leverage to get a higher return on investment, but if you want to be smart about your renovation, about your renters, and about the conditions in which you will sell your properties, not having to make a mortgage gives you a lot of power.
Small business (or angel investing, if you qualify)
This is the investment where you can both control the amount of capital that you put into the business (in my software company, each of the 3 co-founders put in $400 of seed capital), what you provide, and how you find customers. While shoe leather is no guarantee of sales and having the best idea in the world doesn’t mean that you’re going to get the world beating a path to your doorstep, you can certainly improve the odds of succeeding through what you do and how well you do it. Recently I saw a quotation (I’d cite it if I could remember where I saw it) that many great startups that fail have a product, but few startups with customers failed. You have it in your power to improve the chances of getting customers.
Does this list of investments that you can influence mean that you should dump all of your money into them rather than in the stock market? No. However, it does argue that you shouldn’t be trading and you shouldn’t be paying high fees for someone to actively invest/manage funds.
What do you think? Are there other investment classes I missed where you can influence the outcome of your investments? Let’s talk about it in the comments below!