Editor’s Note: Today, we conclude “build your own financial empire” week.
In today’s essay, you’ll learn three strategies for growing and protecting your money no matter what governments and financial markets throw at you.
This essay is part of the “field guide” we send to every new reader of our flagship research service, The Casey Report.
Principle #1: Our money has a passport and no allegiance to a single country or asset class. We’ll go anywhere and buy anything that presents a great opportunity.
If you owned a retail clothing business, would you sell only blue dresses? Probably not. If your goal was profit, you’d probably offer a much broader product line.
If you owned a magazine business, would you publish only magazines about dogs? If your goal was profit, you’d probably offer a much broader product line.
These are obvious questions, to the point of being silly. Yet, many investors make the same mistake as the retail storeowner who sells only blue dresses. They will invest only in their home country. And they will buy only conventional stocks and bonds. It’s a huge mistake that places huge limits on their ability to make great investments.
It’s a big world out there. There are dozens of countries you can invest in. There are investment classes beyond conventional stocks and bonds.
We’ll consider an investment in all of them…as long as the potential reward far outweighs the potential risk.
Principle #2: Develop an obsession with the price you pay for any investment.
Lots of folks will spend hours researching a consumer item like a car or television. They’ll carefully consider the pros and cons of their potential choices. They’ll comparison shop and make an effort to get a great bargain.
These same folks will spend less than 10 minutes making important investment decisions…and give no consideration to buying assets at bargain prices.
We’d like you to become obsessive about the price you pay for any investment. You can lose money by investing in a great business if you pay a bad price. And you can make money by investing in a bad business if you pay a great price.
Consider what happened during and after the 1999 and 2000 stock market peak.
Back then, good companies with solid future prospects – like Walmart and Microsoft – traded at 50, 60, or even 90 times earnings. People who purchased shares back then paid bad prices. They had speculative fever. They didn’t focus on getting good value for their investment dollars.
Because many stocks with good business models were so overvalued, their share prices crashed and went nowhere for many years.
Keep in mind, the underlying businesses were still very sound. Those businesses were still growing. But the stock prices got so out of whack that investors who overpaid suffered horribly. It took a long time for the stocks to “work off” their extremely overvalued state.
For example, in 1999, Walmart traded at more than 50 times earnings. It spent more than a decade working off that overvaluation. Folks who bought Walmart back in 1999 didn’t make any money for more than a decade. The company did fine…but shareholders who bought the stock at stupid prices suffered for a long time.
If you can buy a great business at five to 10 times earnings, it’s a good deal. But if you pay 30 or 50 times earnings for it, you’re bound to be disappointed.
I have to state it again: If you overpay, you can make a horrible investment in a great company.
View your stock, bond, real estate, and commodity purchases just like you would view buying a house, car, phone or even groceries. Don’t be a sucker and overpay. Make sure you get good value for your investment dollar. Hunt for bargains. Those bargains typically come during periods of crisis.
Principle #3: Be willing to hold a large cash balance if no bargains are present.
One of the biggest things investors struggle with is the impulse to “do something.” It’s a natural tendency to want to take action. Both amateurs and professionals struggle with this.
This tendency is dangerous because it leads folks to buy assets just to feel like they’re doing something. Therefore, many people dislike keeping their investable wealth in cash. They’re not comfortable holding a large cash position. This is a huge mistake…
When you buy assets just to fill a psychological need – instead of for an actual good reason – it leads to poor outcomes. It’s like marrying the wrong person just because you’re in a hurry to get married.
What you want to do is stay patient, knowing the market will eventually offer up bargains, and only buy when great bargains appear.
The great investor Ben Graham encouraged folks to think of participating in the stock market as if they were a partner in a business. The hypothetical partner is a crazy guy Graham called Mr. Market.
Mr. Market goes through big mood swings.
Each day, he offers to buy your share of the business or sell you his share of the business at a given price. The decision to buy or sell is up to you. You can sell your share of the business to Mr. Market, buy Mr. Market’s share, or do nothing.
Some days, Mr. Market is on an even keel. He offers to buy or sell at a reasonable price. Some days, Mr. Market is in a wildly optimistic mood. He offers to buy your share at a price that is much higher than the real worth of the business. Some days, Mr. Market is in a terrible mood. On those days, he offers to sell you his share for a very low price.
I think Graham nailed it with this stock market analogy. He knew that people tend to go crazy from time to time. And he knew that presented opportunities to make incredible investments.
Mr. Market’s crazy behavior turns up in both individual stocks and broad market sectors. If you can stay patient and wait for Mr. Market to offer shares at very low prices, you can snap up great bargains.
For example, after the 2008-2009 credit crisis, some of the world’s greatest businesses were available for bargain prices.
The blue-chip industrial giant 3M traded for a P/E of around 8 and offered a 4.9% dividend yield. 3M is one of the world’s safest companies. It has raised its dividend for more than 50 consecutive years.
Altria, the dominant company behind Marlboro cigarettes, got so cheap that it offered investors a dividend yield near 9%. Disney, the premier entertainment company, sold for a P/E of less than 10, which is extremely cheap for an elite business.
Elite businesses often trade for at least 15 times earnings. But during the market panic, you could buy many great businesses for less than 10 times earnings. It was an amazing bargain to buy the likes of Disney and 3M for less than 10 times earnings.
Nobody can tell you exactly when the next crisis will strike a given market sector, but you can bank on it eventually happening.
After all, people tend to go crazy from time to time. Mr. Market will sell assets for pennies on the dollar.
If you know this, it will help you stay patient with your cash and wait for the next fire sale.
We didn’t come up with the principles and guidelines of building financial empires. They’ve been around for centuries. They’re available to anyone. Anyone can learn to make money and save money, and then start acquiring assets when they’re offered at bargain prices.
Keep in mind that your own financial empire doesn’t need to be worth a billion dollars. The important thing is to own a variety of valuable, useful assets that allow you to live the lifestyle you want to live. Some people will find contentment and freedom with a relatively small empire. Some people will always want more. No matter the size of your empire, the principles of building it are the same. And if you’re content with an empire worth $100,000, you’re just as well off as a billionaire.
By learning these principles, and having The Casey Report as your companion, you’ll survive and thrive…no matter what governments and financial markets throw at you. We look forward to helping you build your financial empire.
Editor’s Note: Casey Research’s flagship service The Casey Report is dedicated to helping subscribers build a lifetime of crisis-proof wealth. Led by multimillionaire speculator and New York Times best-selling author Doug Casey, The Casey Report is one of the world’s most respected investment advisories. Right now, you can take a risk-free trial to find out if The Casey Report is for you. Click here to get started.