I have a friend who is a cryptocurrency millionaire. Woohoo!
…But another friend has LOST thousands of dollars messing with crypto. ☹️
I know a couple who made more than $1 million dollars on GameStop stock. Crazy! 😳
…But I also know that many people LOST large chunks of money trading GameStop during the recent wallstreetbets fandango. ☹️
I know some extremely successful real estate investors. 🏠 💰 Cha-ching!
… And yet there are tons of people out there who suck at real estate and have lost a bunch of money. ☹️
Why is it that some people win and other people lose? If they’re all investing in the same types of assets, why are results drastically different?
I think it comes down to these 2 things…
- How people invest (the specific actions they do or don’t do)
- Why people invest (their motives — which guide the actions)
The WHY of Investing
I’m no Warren Buffett, but I’ve studied both successful and unsuccessful investors long enough to notice themes and trends.
Let’s start with a list of WHYs. These are the main reasons I believe successful and unsuccessful people invest:
My buddy John* is probably the worst investor in the world. (his words, not mine!). John tried to invest in cryptocurrency and failed miserably. He tried to buy a rental property — failed. He tried to start a business — lost his life savings. He even tried to invest in index funds (the most no-brainer way to grow wealth) and still somehow lost money doing it! 🤦♂️
From the outside, you might say that John just always has bad luck. But when you ask him WHY he chose his investments, he’ll reveal:
- He traded crypto because everyone else was doing it. He didn’t want to miss out on something skyrocketing.
- He tried house flipping because he thought he could make a quick $50k in 90 days. A TV show he watched made it look so easy…
- John’s business was built around the idea of “screwing over his old boss and workplace.” He wanted revenge.
- He lost money investing in index funds because he thought he could predict when the market was going up and when it was going down.
My theory about WHY is this: If you enter into an investment with corrupt motives, you are likely to fail. Instead, if you have pure intentions, your probability of success is much higher.
The HOW of Investing
The reason I listed the WHYs first is because intent influences actions. I can tell my buddy John about some good investment activities he should follow, but unless he corrects his ill intentions, there’s a high likelihood he’ll find a way to do the exact opposite.
Here’s the list of HOWs and specific actions that successful and unsuccessful people typically do:
I’ve done most of the bad investing things myself. It’s difficult to put emotions aside, think long-term, study your ass off, and follow the boring path.
But the older I get and the more I study successful people, the more I’m learning to stick with the good activities on the right side. It might be boring, but it increases my rate of winning.
Please also note that not everything in my list is so black and white! Everyone interprets these words differently — I only put them in 2 columns for simplicity. It’s not gospel.
Winning a Battle vs. Winning the War
You might be thinking, “Hang on a sec… I know someone who has horrible intentions and gambles constantly, and they are making a shit ton of money right now.”
Yep, there are always going to be exceptions to the rules. Sometimes people are going to be right for all the wrong reasons. But while they might win individual battles, they usually don’t have a consistent strategy to win a war.
Investing is a loooooooooooong game. Think infinitely.
Actually my “bad” investor friend John won a small battle recently. He invested in a meme stock and made 10x his money in just a couple days! I am truly stoked for him and his success. But, as you might have guessed, this win was negative reinforcement for John, so the gains disappeared shortly afterward with other similar risky trades.
Good Intentions + Good Actions = Success
Again, I’m not a genius investor or uber successful billionaire… so take everything I write with a grain of salt.
That said, if I could go back in time and give my younger self advice about how to be more successful at growing wealth, it would be this:
- Before investing, check your motives. Make sure your WHY is pure.
- Follow the proven path, even if it seems boring.
- Mistakes are OK!… Just learn from them.
- Think long-term. Play the infinite game!
- Stick to your own strategy no matter what everyone else is doing. “Just because everyone else around you is winning, it doesn’t mean you’re losing.”
Happy investing! Thanks for reading my dribble. Would love to hear your thoughts in the comments. :)
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Happy Monday Joel!
I think you’re 100% on the spot when you say that you have to stick to your investing plan (and invest for the long run) to actually make money in whatever you decide to invest in. I know quite a few people as well who had an investment strategy, but then (due to FOMO), decided to divert from their investment game plan (aka they invested in GameStop). And, they made some serious losses… I felt terrible for them! And I think that’s an important lesson right there to never stray from your plan.
Thanks for sharing!
Pretty valuable lessons! Cheers Fiona, happy Monday!
Hi Joel (and Fiona),
you both mention that it’s important to focus on the long term and not waver from your initial strategy. I’m wondering until what point that would hold true. What if the rules change? That can make all math and research go out the window.
For example, my initial strategy was to buy properties and let the rent pay down the mortgages slowly. However, the government recently introduced rent control measures which severely limit the rent I can collect. As a result, I need to subsidize this investment with fresh money every month. My ROI has dropped below 2% (and will keep falling as I invest more cash).
Of course I could continue to believe in my strategy and hope for price appreciation or pray that the rent control measures will disappear, but I do wonder if it would make more sense to sell this property and invest the equity elsewhere. Especially as the property market is still strong in my area for now, but if these measures persist I do imagine it will drop over time.
So my question is, when should one correct course? Holding stocks through a downturn is one thing, but needing to consistently “top up” a low-returning investment feels like something else. So I wonder if there is a good way to determine when a change in strategy is merited.
Thanks for your thoughts!
Hey Lady! What you’re explaining seems to be what I’m experiencing with some of my rentals. The landscape in my target area has changed, and I no longer truly believe in the economic outlook of a few properties. Since I don’t want to throw more good money into these investments, I’m pulling out. I’m changing my strategy.
I think changing strategies is OK, and there’s no hard/fast rule on when it’s appropriate. From what I see, unsuccessful people change their minds quickly, often, and without truly thinking things through. They also use the same set of reasons and data to make opposing decisions. If you buy a rental, sell it 2 months later, then buy another using the same plan you bought in the first place, you’re repeating a pattern that probably won’t work out.
All this said, I think it’s definitely fine to back-peddle when unforeseen changes happen. You don’t have to hold onto a losing investment just to prove yourself right.
Hi Joel, thanks for the reply.
That makes sense to me.
So I guess a better rule of thumb for real estate or other ‘income focused’ assets might be, trust the math. If the math tells you that your strategy is working as you thought it would, maintain course. If the math signals something is steering significantly off course, consider course-correcting.
For ‘appreciation focused’ assets, the advice of sticking to a plan and holding through down-turns is probably wise and relevant.
I’ll think further about if/when I will pull out of some of my real estate investments (there are also tax implications on appreciation which will disappear after a few more years of holding). I might write a blog post about this dilemma.
Would be great to read an article about your strategic pivot as well!
Hey Lady! Here’s a post I did recently on moving away from physical rentals. I’ll admit, there’s no specific math in here, although that was a main driver. https://budgetsaresexy.com/why-im-transitioning-away-from-rental-properties/
I hear what you mean about tax implications and transaction costs. Would love to read about your specific issues and holding longer if it makes sense to!
Have a great week! Joel
Thanks for the link, that’s a great post! I see my own thoughts reflected in that a lot, albeit at a much smaller scale. I’ll probably write an article about this at some point too, but not quite yet! Still need to get my thoughts a bit clearer :)
By the way, is there any smart way to sign up to follow comments on your blog? I’m super appreciative of your responses, but I always need to remember to check back here to see them :D I’m not suuuper tech-y, so I may be missing something really obvious, but I appreciate any pointers!
I’m not sure about the comment thing, but will look into it! Sorry!
At work when we are investigating a problem there is a tool called the 5 whys. Where you keep digging to get to the true root cause. I see the ‘to provide for others’ and my ex’s rationale for investment properties comes up. Only, it wasn’t successful. He hit the bubble and sold one for what he paid for it, losing all he put into the renovation. Another he let be foreclosed on. I think his intent was good, but more multi-faceted than just providing. I think there was some ‘everyone else is doing it’, plus some if the actions not being aligned. The house he sold for cost, 2 or 3 friends and I advised against it. And it factored in every big fight for the rest of the relationship. He’d say I didn’t support him with it, I’d say he didn’t listen when he asked for my input.
The tangential involvement is why I have no interest in flipping properties or rentals at this point in my life. I’m good with Vanguard.
Thanks for sharing your friends’ experience and taking a look into some of the reasons behind the ‘unlucky’ individuals.
Hey Jacq, I totally forgot about the 5 whys exercise! What an awesome thing to try with investment decisions :)
Just to add, I also love the 5 Whys. Very broadly applicable in life and very helpful. I don’t always need all 5, but it really helps to clarify the causes.
The best advice “Investing is a loooooooooooong game. Think infinitely.”
All we need is time and patience. That is it. Sure allocations matter, and fees matter, but not as much as good old time.
Great article Joel!
What I thought of while reading it was for every success story there are likely tens/hundreds or more “failure” stories.
FOMO is very powerful, and we all wish we had piled our $$$ into BTC or Tesla or Netflix or (you name it) years ago and we would be millionaires.
I sometimes am gripped by FOMO (used to be a lot more), but now that I am 40 realize there is no free lunch. For all the homerun hitters out there, we have a bunch of people who lost it all (like your buddy “John”).
One thing that J Money taught me was the importance of tracking Net Worth, and you have reinforced that on this blog too in recent articles. If you can see your Net Worth increase over time, that is great. Also, it teaches us to not get too greedy, which is a very valuable lesson.
Anyway, thanks for the great article and reinforcing these principles! I’m happy (content) to have what I have – most of it is invested in my 401k (IRAs) by dollar cost averaging over the past 15 years. I have never hit a home run, but am rounding second base on my way to third base with my FIRE goal.
Love the baseball references! And congrats on the slow and steady investing. It truly is the simplest path to wealth :)
Trying to invest to get short term gains are only for the wealthy. The ones who have a lot of money and don’t care whether they lose it or not.
The lesson is to invest for the long haul and let compound interest and average yearly market returns do the rest. Good intentions are definitely necessary!
The 8th wonder of the world… He who understands it, earns it; he who doesn’t, pays it!
I always think of this:
However, what Fidelity Investments found in their study was shocking. The average investor in the fund actually lost money. You read that correctly… The average investor lost money in the Fidelity Magellan fund under Peter Lynch’s tenure during a period of time when the fund returned around 29% annually.
Investor psychology has a lot to do with investing. And even a “sure thing” isn’t so sure when emotions get involved!
Wow – good find. I didn’t know that!
Great read! I think Warren Buffet said it best with his advice to be greedy when others are fearful and fearful when others are greedy. In order to make money on any investment, you must buy it low (i.e., when everyone is fearful and selling) and sell it high (i.e., when everyone is greedy and buying). Sadly, most people do the opposite – buy when everyone is buying and sell when everyone is selling – and this of course results in losses.
You hit the nail on the head: you’ve got to have a viable strategy before you invest in something and have the discipline to stick with it no matter what everyone else is doing.
Definitely easier said than done! The thing I love about Buffet is even he admits that even he makes mistakes here and there. We all do :) Makes me feel better about the dumb stuff I do.
These How and Why charts regarding investing are golden, Joel! This is the kind of article that needs to be shown in high school economics. I know I’ll be sharing this with my friends just starting out with investing. Very well written, you nailed the difference!
Amen, Joel! I was nodding my head while reading the entire article. It’s all about intention. It all comes down to the underlying reasons of why you choose an investment. Couldn’t have said it better myself!
Cheers FLA! This topic was toying with me for a while before I was able to type it out. It’s easy to identify when people do the wrong things, but it’s hard to figure out the true root cause. It’s usually in the WHY.
Have a great weekend!!