How I Invest My Money

December 11, 2020  | By Kevin Smith

I spend most of my time helping people think about their investing decisions and not much time on my own. An old saying goes “the cobbler’s son has the worst shoes in town”, or something like that. Rather than my son walk around with bad shoes, I prefer to keep my personal investing plan lean and concise, so it doesn’t require much of my daily attention. Here is my back of the napkin personal investing philosophy.

Accept the Luck Part

Starting conditions matter. Super low interest rates mean low expected returns on cash and bonds. Low dividend rates and high valuations on US stocks mean low expected returns on stocks. Endless massive money printing and federal debt means higher taxes and inflation are probably on the way. These are headwinds for the economy, but there is no way to accurately predict their timing or degree of impact.

On the sunny side, people are innovative and resilient as long as they are free to exchange, allowing for the creation of amazing technology that will create new opportunities that are hard to imagine now. That is the tailwind for the economy, and I am optimistic about growth over the long term.

Whatever happens in markets will unfold in surprising ways: some good and some bad. The future of my investments will be subject to randomness (i.e. pandemics, etc), and I need to get used to that. There is no strategy that works all the time, and the best strategy always seems obvious in hindsight, so I remind myself: don’t be overconfident and don’t panic.

Start with a Basic Allocation Plan: Stocks, Bonds, and Cash

I only keep as much cash as I need for spending this year and to keep me out of trouble in a pinch. I only hold enough in bonds to preserve capital for big spending in the next couple of years (remodel, new car, etc). Stocks will probably beat bonds by 3-5%/year, hopefully more, so I put the rest in stocks. I don’t mind long periods of decline because I will be investing new dollars every two weeks, and I won’t sell for many years. These decisions will probably make the biggest difference 20 or 30 years from now.

Which stocks to buy?

1. Invest in my own business. I have been doing this primarily for about a decade and am now working toward a broader portfolio.

2. Start with the global stock market index so I don’t miss the majority of long-term returns, then…

3. Tilt for historically durable advantages: stocks with attractive prices relative to fundamentals (earnings, cash flow, sales, etc), add smaller companies, then favor high profitability companies and stocks with price momentum. I use professional managers for this.

4. Add long term growth ideas: emerging markets for their youthful demographics and growing consumer class, and innovative technologies for high growth possibilities.

5. A pinch of gold / bitcoin for insurance against extraordinary outcomes. This is a small allocation and new for 2020, motivated by the COVID response.

What I don’t buy.

Speculative individual stocks. Stock pickers have demonstrated poor results on average and are easily fooled into thinking success is the result of skill and instincts, when it is most often a result of luck and temporary price bubbles. Even after performing in-depth research on business cash flows, revenue models, risks, and more, stock picking is too much like gambling. I prefer the casino’s business model to the gambler’s business model. I would pick a few individual stocks if I thought it was fun, but that’s not how I get my kicks these days.

Investment real estate – not because it can’t be a good investment, but because I don’t want to manage it. I may change my mind on this eventually. I suspect outsized returns from real estate come from levering otherwise mediocre returns with debt, fortunate timing in ‘hot’ markets (instincts? luck?), and/or buying at deep discounts from motivated sellers. I don’t have an appetite for real estate adventures at the moment.

Startups – this requires more capital than I have available to lose, and I don’t have time to treat it as a business, which I believe is necessary for sustained success.

Options and other derivatives – if these financial tools aren’t used for hedging risk, they are used for levering speculative bets. I don’t have a use for them in either case.

When do I buy?

I buy whenever I have excess cash. I don’t attempt timing the market’s ups and downs. Rather, I rebalance after markets move dramatically, buying more of what comes on sale and selling some of what has done extremely well.

Investing is personal and this works for me, but there are many variations that can get the job done. Crafting a personal investment philosophy is a lifelong project, similar in nature to managing personal health and relationships. A balanced approach can yield results and enjoyment without too much stress and anxiety.

This post was inspired by a new book by the same title. The idea is financial professionals describing how they personally invest, rather than just yammering on about academic research and strategies, as we are known to do.