The Why Of Investing

A lot is said about the how of investing. What kind of assets should you hold? What’s the best way of planning for your retirement? And is property a better bet than the stock market? Plenty of experts have had a crack at answering these questions.

But what about the why of investing? As we’ll see when we look at what six top investors do with their money, this question is just as important.

What do you want to achieve? Answer that, and the practical matters of which assets to buy or how to structure your retirement fund suddenly come into focus.

Why you invest, in other words, tells you a lot about how to invest.

There are no universal truths when it comes to investing.

Sandy Gottesman is a billionaire who founded the New York-based investment firm called First Manhattan. He always asks interviewees hoping to join his team the same question. He doesn’t quiz them about the best stocks to buy right now or which economy is heading into a recession, though – what he wants to know is what candidates own, and why.

What, in other words, do they do with their own money? Financial writer Morgan Housel, the first investor we’ll be looking at in this post , loves this question because it underscores how personal money is. How you spend or save your money says something about who you are.

According to the financial services firm Morningstar, just half of all mutual fund portfolio managers in the US invest in their own funds. At first sight, that might look like hypocrisy. If those funds were so great, wouldn’t the people managing them put their money where their mouths are and invest in them too? Not necessarily.

We can see why by turning to an article titled “How Doctors Die” published in 2011 by the American professor of medicine Ken Murray.

Murray shows that doctors diagnosed with terminal illnesses typically choose much more minimal end-of-life treatments than they prescribe for patients in the same position. Why? Well, their patients aren’t medical experts. Unlike doctors, they may not fully understand their situation; some may even continue to hope for a miraculous recovery. In short, they want more treatment.

Doctors and non-doctors, it turns out, have different needs in identical situations, which is why they get different treatments.

That just goes to show that it’s not always a bad thing when someone tells you to do something they don’t intend to do themselves. Financial experts are like doctors in this respect. Their job is to help you meet your needs – not to hand out universal prescriptions that also meet their needs.

So, what you do with your money depends on what you want to achieve. Housel and his wife, for example, value nothing more than independence, and that shapes their financial decisions.

Despite enjoying rising incomes for over a decade, they’ve kept their lifestyle pegged at the same level it was at when they married. Every cent of every raise since then has gone into an independence fund – a financial buffer which will allow them to do what they want on their own terms later on in life.

Dividend-paying investments provide a stable and growing income.

Jenny Harrington isn’t only the CEO of Gilman Hill Asset Management, she’s also the portfolio manager of the company’s equity income strategy. When it comes to her favored investment strategy, it turns out she discovered it by chance.

In 2001, a client called her to say that he was getting ready to retire. What he needed was an income. But, being just 55, he also needed that income to grow over time.

These objectives aren’t always compatible. Some investments, such as bonds, provide a stable income without growing. In other cases, drawing an income requires you to periodically sell assets like stocks, which gradually depletes your overall income-generating investment fund. That’s a problem if you’re retiring relatively early like Harrington’s client. But luckily, there’s an alternative.

When you invest in bonds, you’re lending money to a company. In return, you receive an IOU – that’s essentially what a bond is – and regular interest payments on that loan. Bonds do provide a stable income, but that income doesn’t grow.

That’s where dividend stocks come in. When you invest in these stocks, you buy a stake in a company, which then pays out dividends – regular, fixed payments – from the profits left over after it’s serviced its debt and reinvested a portion of its revenue.

Companies issue dividend stocks when they expect their revenues and profits to grow. Investors give their cash to these firms because they have solid business plans. In return, they receive a share of their cash flow. The more the company grows, the larger the dividends paid out to investors.

Harrington, who moved her client’s investments into a dividend income portfolio, sees this strategy as one of the purest mechanisms for generating shareholder return. The trick is to pick the right company.

The best bets are mature businesses with long histories of consistent revenue and profit generation – think of well-established corporations like AT&T, Verizon, or IBM. But there are other, more niche options, too. Take Douglas Dynamics, for example.

Douglas produces snow plows. On a year-by-year basis, Douglas’s sales are inconsistent. The company sells more plows some years and shifts fewer units in others. Zoom out, though, and you quickly see that its sales record consistently trends upward over an eight-year cycle. Harrington hitched her investment into Douglas to these eight-year cycles. The result? Steady capital appreciation and an income that increases over time.

Investing is about more than returns – it’s about values.

Dasarte Yarnway, the founder and managing director of Berknell Financial Group, values time above all other assets.

He’s the son of Liberian parents who fled to the United States after their country was engulfed by a deadly civil war in the late 1980s. Yarnway has experienced many devastating losses in his life and these tragic events have shaped the way he thinks about the world. Nothing, he believes, is more precious than the time given to us on this planet.

Yarnway’s family was poor in dollars, but – as he puts it – “rich in love.” They had little to spare, but they were grateful to have found safety in the United States.

Still, putting food on the table was a struggle. His father had to work long shifts across multiple jobs to make ends meet. That left little time for his children. When important moments like Yarnway’s first game with his football team came around, his father rarely had the time to be there.

After earning his spurs with larger financial services companies, Yarnway founded his own company in 2015 – the Berknell Financial Group – and made himself the sole equity owner. This investment allows him to do two things.

First off, it gives him control over his own time. As a business owner, Yarnway is his own boss. He gets to decide when he needs to be in the office and when to shut up shop. He calls this equity in time. It’s a form of wealth that gives you something money alone can’t – the ability to be physically present during life’s precious moments. When he marries and has kids, Yarnway wants to be the kind of husband and father who always has time for his family.

Investing in his own company also allows him to fulfill the role of a servant-leader. As he sees it, actions – not words – determine who we really are. Running a business is all about doing, and Yarnway aims to lead by example. Berknell isn’t just about revenue. It’s about showing people in his community what it means to commit to something and motivating them to make the most of their own abilities and pursue their true callings. Seeing others prosper as a result of these actions, Yarnway says, is the biggest rate of return he could ever hope for.

Keeping it simple can yield long-term rewards.

Investment research is based on data about the past. That’s obvious – we can’t generate data about a future that doesn’t exist. Obvious truths, however, often have profound implications.

Lots of investors try to create portfolios which contain a mix of assets ideally suited to the market. Other investors, by contrast, argue that the “optimal” portfolio is a pipe-dream. Because we’re investing in a future that is, by definition, unknown, the data that informs our decisions is always out of date. The “optimal” strategy, then, can only be known in hindsight, at which point it’s too late anyway.

For some, this might sound like a counsel of despair. If we can’t make informed decisions, how are we supposed to rationally manage our investments? Ashby Daniels, an advisor at Shorebridge Wealth Management, doesn’t see it that way.

Daniels has three major financial objectives: saving for retirement, putting his two children through college, and maintaining an emergency fund. These are all long-term goals and his short-term needs are covered by his income. This fact shapes his view of investing.

Take his portfolio, which is 100 percent equities – shares bought in the expectation that they’ll rise in value, at which point investors receive the monetary difference between their investment and the current price.

Equities are a divisive topic. The main objection to them is their volatility. Their value goes down as well as up. Sound investments do pay off eventually, of course, but getting to that point can be a nervy journey. Investors sit on the sidelines watching their stocks appreciate and depreciate and don’t get a single cent until the market says so.

But, as Daniels points out, there’s a trade-off here. Lots of investment vehicles, like government-issued bonds, are designed to reduce volatility, but anything that lowers short-term volatility also lowers long-term gains. If you have the stomach for this emotional rollercoaster and the patience to wait the market out, equities can give you something few other investments can: huge windfalls.

What about the risk of being wiped out? Daniels’s solution is to invest in a diversified mix of index funds. Index portfolios give you broad market exposure and mean you’re not pinning all your hopes on a single winner. The next step? Be patient and resist the urge to tinker with your investments. Remember, when you try to beat the market, you also risk underperforming the market. 

Mistakes are inevitable, but they can also open new doors.

Financial consultant Tyrone Ross is widely regarded as an up-and-coming talent destined to change the face of wealth management, but he only learned what the stock market was when he was 26.

After growing up in poverty in what he calls a “financially illiterate” home, Ross worked a series of odd jobs until he one day found himself interviewing for a position at a financial firm.

How, his future boss asked him, would his experience as a probation officer help him on Wall Street? Ross can’t remember what he said, but it must have been persuasive. He got the job.

It was the start of a steep learning curve. How does a 401(k) pension plan work? Ross had no idea when he started out on Wall Street. When he found out, he set one up for himself but quickly emptied it to fund his increasingly lavish lifestyle.

It was the first in a series of dumb financial moves. He bought flashy jewelry and a fast car. He was earning more than at any other point in his life, but his paychecks barely covered his expenses. His credit rating started plummeting. Something had to give.

The answer to Ross’s problems came in the form of a move to a chop shop – an old-school Wall Street operation in which grunts cold-call potential customers and pitch speculative investments. It wasn’t glamorous, but spending the day trying to convince people to buy stocks taught him how the market works. The job was supposed to be a temporary stopgap, but it ended up opening doors.

Ross’s newfound knowledge of the stock market landed him a position as a trainee advisor at Merrill Lynch. It was there that he became a full-fledged investor. He set up a new 401(k) and bought a ton of Bank of America stock. He was now working with wealthy families, who he advised on financial planning, and gradually learned how America’s richest individuals make, multiply, transfer, and protect their money.

In 2017, Ross quit Merrill Lynch and established himself as an independent investor. The majority of his investments are in crypto-assets like Bitcoin while the rest are divided between retirement and health savings accounts. It’s a risky spread, as Ross himself acknowledges, but he’s still young and single, which is why he’s happy to bear the risk.

Sometimes you just have to learn to let go.

Investing is a serious business. Some investors, however, take it too seriously. They fret about the market and obsess over what their money is doing. They check their portfolios ten, 15, or even 20 times a day.

In the short to medium term, this kind of obsessiveness can yield decent results. In the long term, though, it’s often counterproductive. When you become emotionally over-invested in the performance of your stocks, bonds, and assets, it’s easy to forget that losses are inevitable. And when things do go wrong, you lose your cool and make hasty calls.

According to Joshua Rogers, the founder and CEO of Arete Wealth, that’s a recipe for disaster.

When it comes to investing, Rogers takes his cue from Deepak Chopra’s 1994 book, The Seven Spiritual Laws of Success. Chopra’s second law, the “Law of Giving,” states that all forms of wealth are gifts which should be both gratefully received and graciously given. Whether it’s a flower, a compliment, or positive energy, Chopra urges us all to give something of value to everyone we meet each day.

Generosity helps wealth flow freely. Why does this matter? Take the body as an analogy. When you tie a tourniquet around a limb, you stem the flow of blood, which eventually leads to the need for amputation, or even death. It’s the same with money. Tightfistedness, suspicion, and fear are mental blockages that prevent wealth from getting to where it needs to go. The result is financial amputation. Like blood, money needs to circulate.

How do Chopra’s ideas inform Rogers’s investing strategy? Well, he tries to be generous and open-minded. He takes risks and doesn’t worry about other people making money – there’s more than enough to go around, after all. More importantly, he invests in people he likes and trusts. This fosters openness and positivity, creating greater circulation and greater abundance.

This mindset also helps him deal with losses. One of the most common mistakes investors make is doubling down on losing investments. This isn’t just a matter of throwing good money after bad – it’s also a question of opportunity costs. When you hold onto a bad investment, you can’t refocus on good investments. That’s why the best traders cut ties and move on quickly.

Losses are inevitable. What really counts is what you do next.

Money is personal. It’s not just how you spend and save it that tells the world something about who you are – personal requirements also matter when it comes to picking investment strategies. Someone looking into early retirement, for example, needs an income that grows over time. Their best bet? Dividend investments. Someone who wants to spend more time with their family, by contrast, might be better off investing in their own business. And that's the main point: there's no single right way of investing your money!