Monday, February 19, 2018
They do not invest outside their circle of competence.
In fact, determining your circle of competence is the first step toward becoming a great investor. What exactly does that mean? Simple: Determine what you you actually understand or are capable of understanding. Warren Buffet doesn't invest in technology. It's just one of those things that are further outside the realm of his understanding than he cares for when it comes to investing. The folks on Shark Tank frequently claim the same thing. They say things like "I'm sorry, this is just not an industry that I'm comfortable with, and I can't help you." If they aren't putting their money in things they don't understand, then why should you?
It's funny. Today, people are either holding their money in savings accounts that earn them next to nothing, or they throw their money into investments that they don't really understand. These both sound like fools errands to me.
Right now, my biggest investment is a rental property in Portland, Oregon. I lived in Portland for many years. I understand the real estate market there very well. I have rented there; I have owned there; I have lived there. I understand how much houses sell for, rent for.. I know which neighborhoods are good, bad, and ugly. Portland real estate is definitely within my circle of competence. I would definitely place another investment there if the other numbers made sense, because I am confident in my ability to actually determine whether or not the numbers make sense. Unfortunately, right now, I don't really think the numbers in Portland real estate make sense for investing purposes (at least not for me; you should make your own determination).
"Circle of Competence" is one of the primary reasons real estate investors are so frequently only really looking into real estate in the town/city where they live. It makes sense, right? They live there, and they understand the basic real estate environment. On one hand, this is pretty smart. You definitely shouldn't invest in things you don't understand (Hello crash of 2008!). On the other hand, the numbers have to make sense as well. I know, I'm not actually telling you what numbers to look at yet, but I don't want this post to become a novel on its own, so we'll do that another time. Regardless, my point is that first, you need to understand what's in your circle of competence. Then, you need to determine what the numbers need to look like to make sense before you pull the trigger. Then, you wait. Very little of an investor's time is spent actually making deals. Most of it is involved in self-education and waiting. I haven't pulled the trigger on an investment in some time...
If you're looking to determine your own circle of competence start by considering what businesses or industries do you frequent? Do you understand how they work, or could you? What cities or towns to you understand well enough in terms of real estate? Once you have a list, use your smart phone to start following the stocks of companies that fit within your sphere. Perhaps, you sign up for some real estate notifications so that you can keep up with the market in the cities/towns you understand. You'll have more research to do, but this is a really great start.
I have determined my Circle of Competence in both real estate and the stock market. Now, I am researching and waiting. The brilliant part of this is that the research is helping to expand my Circle of Competence, and when the numbers look right on a piece of real estate or a stock I'm interested in, I will be ready to move!
Sunday, February 18, 2018
Even if you like what you do for a living, there are probably times you'd like to be doing something else. Maybe you'd prefer to work part-time, work via remote, or not work at all. No judgement. Just honest observations regarding the nature of work. So, every minute you spend at your 9-5 is a minute you are not spending with your family, reading, meditating, or otherwise doing something else. We're all losing these minutes of our lives, and it's pretty scary when you put it into those terms. Some of these minutes are being traded for dollars. Since I'm not being given more minutes, I had better make the dollars I'm getting count!
Every time I buy something, I think about trading minutes for it. I almost bought gum the other day, but I stopped. The truth is that even though gum is pretty cheap, I don't really like gum more than I like my minutes, and I don't actually need the gum. So, it stayed in the store.
Each time I get a paycheck, I feel a tremendous sense of urgency to make a very smart choice with it, because it represents a lot of my minutes, minutes I'm not actually getting back. The less debt I have, the less minutes I have to trade someone for dollars each month...AND if I'm really smart with my dollars, I can invest them in a way that will create more dollars without me trading any additional minutes to get them. So, my goal is to need a very minimal number of dollars on a monthly basis. My other goal is to use my dollars to create enough of a passive income stream to allow me to stop trading my precious minutes for dollars.
Thank you for going down the philosophical rabbit hole with me today. If you've ever thought of money in this way, or it made you consider your own philosophy of money, feel free to leave a comment.