An investor is a person who recognizes value and is interested in creating sustainable growth and therefore profits. They see the bigger picture while others are focused on numbers.
The reason a physician would want to become an investor is so that they can grow their wealth or it might be because they enjoy the process. It’s infinitely harder to achieve wealth without having good investing skills and the same can be said if you don’t enjoy the process.
In order to invest we need capital which can come from our own wealth or from others or it can be borrowed.
Seed capital is used to add value to a particular process and from that added value flows forth profits which can then be turned into more capital.
Because we are disposable units as human beings on this planet we have already made a very broad investment choice based on which country we are living in. As physicians we can live anywhere in the world and have chosen to live in the US. Whether you believe this is a capitalist economy or another form, by living in the US we have certain rules by which we can play.
I mention this notion of our living locale because all these concepts tie into each other, investing, wealth, income, lifestyle, assets, security, and risk.
To become a successful investor we need investment capital.
A teenager can use their parent’s backyard to grow some garlic and sell it as organic produce to local restaurants. The startup capital for this endeavor is very little. Some ongoing capital in the form of time is required as well.
This teenager was able to source the land from her parents, obtained the information for free on YouTube, and used their free time to market the product to local grocery stores.
Value is created for the restaurant as well as the teenage investor. The restaurant is getting a locally sourced product from a reliable person and the teenager is gaining valuable skills which can be later used for future successful endeavors.
It might seem worlds apart to juxtapose an old white guy who owns 3 lots in Oregon which he is each developing into 300-unit apartment complexes. In fact, he is doing the same thing as the teenager, investing with capital, creating value, and reaping profits.
Finally, the handsome, tall, sexy Dr. Mo might take his capital earned from working a job and invest it in stocks. That’s just another way that a person can become an investor. Unfortunately for Dr. Mo, this kind of investing is highly regulated and completely out of his hands. In fact his index fund investing is not real investing but we’ll leave that for another post.
Regulation and Taxes
To be a successful investor we have to understand local regulations and taxes because these determine risk and profits.
From the example above, the securities market is a giant Ponzi scheme and highly regulated. Doesn’t mean you can’t make money in it but because of its tight regulation and unpredictability it makes for a poor investment.
Real estate is also highly regulated and once you get into commercial real estate it’s not much different from the securities market. However, residential real estate has enough wiggle room to still allow an investor to create value.
The IRS tax code, though insanely complicated, is fairly straightforward and certainly favorable for the investor. In fact, it’s very safe to say that the physician income earner is penalized while the investor is rewarded by the US tax code.
The teenager buys some garlic bulbs or seeds, pays to have the soil tested, pays for the water, some netting to protect the crop from animals, and printed flyers to market to local restaurants.
Our teenager is creating value in the land which was previously standing useless growing grass. She is able to outperform the competition because she has decided to deliver all her organic garlic to local restaurants by bicycle. Because of this lower carbon footprint she qualifies for some government subsidies and gets grants from sustainable farming coalitions.
I’ll end this section by saying that it pays to understand the US tax code. No need to cheat it but if you understand it then you can use it in your favor to keep more of the value which you create from an investment.
Our brave teenager could start growing the garlic for shits and giggles but then she’s not an investor and might just spend her time and her parent’s resources without producing much value.
However, if she comes up with a business strategy and does a light market research then she would have an idea of what each garlic bulb will fetch her when sold wholesale to local restaurants.
Our teenager’s investment risks are that she will have an overnight temperature drop killing off her crop or have a bug infestation which she didn’t address timely.
Her investment would also be at risk if she didn’t get the proper licenses and permits to sell the produce and end up getting reported to the state by her competition and have to figure out what to do with 150 bulbs of garlic.
For some incomprehensible reason our society and parents believe that mistakes are bad and should be avoided. Few seem to realize that it’s from mistakes that we learn the most and make the most progress.
Our teenager’s vampire repelling crop might fail the first season or be inconsistent the next. However, her farming skills will always be with her. So will her negotiation skills, her sales techniques, and her marketing skills. Allah forbid we teach that shit in school – no, let’s teach kids calculus.
Concept of Value
I don’t have the right verbal skills to effectively convey the importance of value so let me give you an example of a house in Miami Beach. It could be rented to a family for $5,000/month with a traditional lease after the owner empties the place of all personal furniture and spends extra money rent-proofing it.
Alternatively, that house could be rented as a vacation home at $900/night with all furniture left in place. Assuming a low 50% occupancy rate there would still be a $100,000 increased profit from this latter investing method.
This value was created by a friend of mine who recognized the unique opportunity with his residential real estate after his realtor was unable to sell the house and he didn’t find a long-term tenant in time.
Another investor might come along and determine that if this house had a second story added to it then they could sell this house for $2.5 million more with only a $200,000 invested. This is yet another method of creating value.
Value is a very unique concept and is what each of us can bring to any investment. It’s the creative touch which comes from trial and error and research.
What’s the reason you are investing or what motivates you to be an investor?
What are your investing goals?
These might appear to be existential questions but it’s important to have answers to these because it’s all butterflies and snowflakes until 2008 happens or you get divorced or your child dies in a tragic accident.
Morbid – I know.
But that’s life. Shit happens. Especially shit you didn’t expect would happen. During such tragic times is when we potentially lose our purpose and spiral downwards. Though I don’t have a solution to facing such tragedies, I feel it’s important to address the financial side of any of life’s disasters.
I, Dr. Mo, invest in order to be less reliant on a job and the economy as a whole. My goal is to be less easily manipulated by the external forces.
I also invest because I want the freedom of time which is true freedom; not the kind of freedom where I have to commute in a car for 2 hours a day, pay 50% in taxes, and depend on a government to bail me out of my financial problems.
If you enjoy investing then wealth is a side effect of such a pursuit. If you don’t enjoy investing then it would be worthwhile to either find a reliable source of income or partner up with a savvy financial adviser who can help you become an investor or invest your money for you.
Or perhaps you have life goals which can be achieved without any investing skills. I can imagine someone who is living a very simple life with a small overhead and a high hourly wage to be in such a position.
Types of Investing
The world of investing is actually fascinating and it’s not just about making your $X become $2X.
There is growth investing where you invest in a company or system because you believe that it has a huge future upside. Early Netflix investors may have been growth investors. All Venture Capitalist are growth investors.
An auto mechanic shop could be a growth investment. You start out with one mechanic, you reinvest all the money back into the shop to either buy the building or more equipment, hoping that in the future you can sell the business for a profitable sum. You are less focused on how much it earns you on a monthly basis – just enough to pay you living wages.
Value investing is a slightly safer strategy than growth investing. The value investor looks for a proven business model and puts their money into that stock or business when they think the price is lower than it should be.
A great example comes from our recent stock market correct where we had a sudden 10% drop in many stock prices for no obvious reason. The savvy value investor would look at a large company such as Walmart and say that because the company hasn’t changed in any way but trading at $100/stock from its $110/stock just a few days prior that they are essentially getting a 10% discount for buying that stock.
Buying a franchise business is another great example of value investing. The business model is already determined and successful. All you need to do is be in charge of hiring employees, attending franchisee classes, and running the business. For this you will earn a steady income.
You may not realize this but you are income investing when you decide to put in enough work credits by participating in the labor market to get your required 40 points necessary to vest in social security income.
The concept of income investing is that you take your money out of the trash bags which you have buried in the backyard and you put it in something that will offer you steady ongoing income.
A real estate investor might be focused on rental income properties and buy only inexpensive single family homes for the sake of recurrent rental income.
It would be unwise if this investor missed out on a local real estate boom where their rental income properties were suddenly worth double what he paid. The savvy investor would sell a couple of their appreciated properties and diversify into another real estate market or in a different investment altogether.
Investing strategy isn’t just important when it comes to increasing profits but also when dealing with investment risk. From the example above where our teenager ended up with 150 garlic bulbs and no way of selling them to the local restaurants, she could either throw out the garlic bulbs or adjust her investing strategy by utilizing her creativity.
Hopefully her business strategy took into consideration that she may end up one day with a ton of unsellable garlic. Even if she didn’t then she could take those garlic bulbs and make black garlic paste from them while simultaneously working on her wholesale license for the next growing season.
I would love to believe that I am diversified because I have both stocks and bonds in my investment portfolio but that’s obviously not the case.
The correct statement is that I am sub-diversified within my securities investments which isn’t bad but it’s not real diversification.
An investor diversifies by recognizing and creating value. In the securities markets this can be somewhat achieved by investing in small cap funds when there is a bull market or tilting more towards international funds as globalization expands.
Adding real estate and a business to our sources of income is legitimate way of diversifying our investments.
The successful investor rarely will have a complex investing strategy. Over the years they have been working on simplifying their strategy because they know that by having fewer variables involved they will be more efficient.
Complexity often takes up a lot of resources, specifically time. The only way complexity can be retained and tamed is if the investor has solid management skills and able to delegate.
A full-time dentist who has 10 single family homes which she rents out and manages herself is stretching herself thin. She is trading one resource for another – time for money. There is no value being created there and if we account for her hourly wage then she is actually losing money.
If she could take these 10 single family units and consolidate them or place them under the management of a property manager and still create profits then she becomes a successful manager and is still creating value – perhaps even more value even though her profits might be lower.
This requires the ability to manage human beings, understanding employment laws, and some time-management skills.
Passing on an Investment
The most successful entrepreneurs and investors will tell you that the toughest and most effective thing you can do as an investor is to know when to pass on an investment.
There are always way more investing opportunities than there are opportunities to create real value. Most are busts.
A buddy of mine owns 3 townhouses in NY which are his rental income properties. The only problem is that as a busy Interventional Radiologist he isn’t able to properly handle these investments which has caused him to lose track of expenses on repairs and revenue lost due to unoccupancy.
Even worse, he is losing money every month on the spread between the rental income and the mortgage payments/taxes/fees.