Episode Details

There are a number of factors that I consider when contemplating an investment on behalf of my clients or for me, personally.

I think it’s very important to consider a vast array of investment opportunities (or appoint an advisor to do it on your behalf). But it is even more important to discount most of them. Being diligent, setting a high bar and having the discipline to stick to sound fundamentals is critical for success.

This blog sets out the important factors that I always consider.

Will it materially improve your financial position 10 years from now?

It is often tempting to invest in ideas or opportunities that may promise to provide quick investment returns. Doing so appeals to our desire for instant gratification (reward). One of my favourite quotes is from Howard Schultz (billionaire and founder of Starbucks); “short term profit rarely creates long term value”. It’s very true.

A quick profit is nice, but it’s not the solution to building long-term wealth, unless you can consistently pick the next short term opportunity. But that is impossible to do. The problem is these ‘quick profit’ opportunities tend to be inherently risky (so many don’t work out well) and provide a one-time return only.

Instead, you are much better off to invest in assets that provide predictable returns over very long periods of time. Investing in an asset that provides an average return of 7% p.a. over the next 30 years will magnify its value by 7.6 times.

Asking yourself whether the investment you are considering will materially improve your financial position in 10 years’ time, forces you to think long-term. It helps you avoid the shiny objects (i.e. opportunities that trick you into believing they’ll deliver quick profits).

Ironically, the older we become, the easier we find it to make long-term decisions. Or maybe we just get more comfortable with delayed gratification. Either way, it requires discipline and patience.

Do you understand what’s driving the expected returns?

Don’t invest in anything you don’t understand.

You need to understand how the investment will work. How will the returns be generated? It must make sense.

For example, if you are investing in a property in a blue-chip and highly sort after location, it is easy to understand how that property will be worth a lot more in 30 years from now. How much more is uncertain, of course. But it stands to reason that its likely to outperform the “average” property.

However, for example, this is my problem with Bitcoin. I understand what it “could” be used for. I understand the advantages of a decentralised currency that offers privacy (anonymity). But the reality is that the vast majority of people currently buying Bitcoin are doing so for pure speculative purposes. Therefore, the only way I can make a return is if it attracts an increasing number of speculators. And that feels very risky to me. I invest. I do not speculate.

All fundamentally sound investments can be explained in simple terms using basic logic. It’s important that you understand this logic. If you are not able to do that, don’t invest.

Where is the evidence?

There is no need to throw darts at a dartboard. There are plenty of investment opportunities (asset classes and investment methodologies) that offer good long-term returns of 8-10% p.a., which are supported by an overwhelming body of evidence.

Therefore, when contemplating an investment, ask yourself where is the evidence that this is going to work. The fact is that such evide