Decisiveness and Diversification

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"After studying over 500 millionaires, including Andrew Carnegie, Henry Ford, and Charles M. Schwab, journalist and author Napoleon Hill found that they shared a single quality: Decisiveness," writes Kathleen Elkins of Business Insider in the article Rich People are Decisive. Some of the other habits of people like Andrew Carnegie, Charles Schwab, and Henry Ford were rising early, exercising regularly, making time to read, and associating with others who are successful. 

This all seems fairly basic, Henry Ford did not build an assembly line of the first mass produced car by hitting the snooze button. Returning to the idea of decisiveness, you either understand a business' fundamental principles or you do not. If you do not understand an asset class or particular discipline, there is an abundance of education available many times for free. So although mastering theory may take varying amounts of time based on the student's aptitude, anyone can master theory at a rudimentary level. A book, a class, a tour, or a summit are great places to start in educating ourselves, however, many successful investors will tell you that these sources are great starting points, but they have shaped careers built around associating with people who are doing and putting into practice the theory that they have learned. 

What if I make a mistake? Mistakes when you are first starting out seem daunting. It's stressful. When you have never put together a real estate deal, decided to buy an equity or fixed asset, or purchased fine art you may be thinking "what if this all goes wrong." However, what I've come to believe is true is the following--no one is going to believe in you more than you. So if you do not believe in yourself and especially your ideas, why should anybody else? You will not go very far without building networks and working in some capacity with other professionals. 

To have strong convictions, you must know yourself which means knowing your own values. Who am I as a person? Who am I as an investor? What is my risk appetite? Once each individual has determined the answers to these questions, you must test your theories through debate, performing quality analysis on your hypotheses, and then finally at some point you must take action. Not taking any action and letting the forces that be guide you along is a choice that history has not been kind to. Procrastinating is a losing strategy that is passive and will wipe any investor out with enough time. To be clear, that's not to say that the right answer is always to buy something, sometimes that may mean to sell, hold, or trade up. Recognize each situation for what it is and use your knowledge and experience to make a decision that's best for you. 

I will pivot on topics and take it one step further, for most people diversification is a losing strategy. I realize that last statement is controversial and met by many rolling their eyes. Let me explain my thinking. First, who should be be diversified: the poor, the elderly, and the wealthy. First, the poor. If you are poor, you are thinking about day-to-day issues that are far more important than building wealth. You need a place to sleep and to eat something that takes precedence over buying an emerging artist's painting. A poor person would want to break the cycle of living paycheck to paycheck, debt, and so on first and foremost. To the elderly, it's probably not a great idea to put all your assets into one thing in the last phase of life. To the wealthy and well-connected, like Warren Buffett, it makes great sense to spread your wealth around to different asset classes and businesses. 

That is who should diversify. For the rest of us, diversification causes you to try to be good or average at a lot of different asset classes. To give an example, I could study up plumbing an know a lot of different things about it, and then do the same for roofs, electric, foundation, concrete, tile, and so on. How good do you think I would build a house if I read a book or watched a video on those particular trades? My insurance agent would not be pleased. 

I worked in software development for many years and it was always amusing when people would talk about the next app that was going to take over the world. "How are you going to build the app?" I would ask. "Oh, I've got an idea that's going to change the world. I will just put it out on the internet and look for a developer or maybe take the idea to a group in India to build for me." Keep in mind these people had never worked at a software company, built anything that worked, or had any success in the e-commerce. Little do they realize, there are experts that are so specified in the field that focus on one tiny area and do it really really well. Why would you think that you without any experience could beat a bunch experts of live, breathe, and sleep this field? The answer is they can't win because they are not experts. Information and data move so quickly and smart companies are able to respond faster than ever not because management has a higher IQ, but because this is all they do all day, every day. They don't try to be good at fifteen topics, they are exceptional at creating value on one issue. I believe that whatever amount of money you are comfortable investing that you pick an area the you know a lot about or someone you trust knows a lot about and find 1-3 ideas that you are really passionate about. 

Diversification sounds great, but you are also banking on a lot of variables totally out of your control to go right as well. Many people sure thought that they were well diversified when their money managers put them into funds that included Credit-Default Swaps, Bear Stearns, and Lehman Brothers. These were A+ ideas these money managers thought. Or what about investing municipal bonds? You may be surprised to learn that 51 U.S. municipalities have filed for bankruptcy since 2010. Chicago and Detroit both have extremely desperate funding situations, the same goes for T-bills, and debt across the world. Every investment carries risk. 

I am not encouraging investing on anything on a whim or risking your rent money or mortgage payment on going all in on one idea. I am advocating that at a certain point theory can only take you so far and you can waste a lot of time analyzing instead practicing your craft. Being decisive has helped me to put together great deals, caused me to realize when I have gone off course, and taught me a lot more than any book ever could. Being an  expert in your field and betting on yourself in that discipline is the choice that I choose to make. Happy investing! 

Thank you for such a great post! It reflects on a lot of the things that I think about a lot when I look at our society and their way of thinking as a whole. We promote multitasking (or multithinking as I think of it), which takes our focus or decisiveness out of the picture entirely, but yet it is needed for us to become an expert in any one thing before we start that diversify thinking. 

I agree with a lot of your post, but diversification for the wealthy is not because they have "business connections."  It is because they have made their money and the incentive to chase incremental dollars is lower than it is for those working for a living.  They also value playing defense and protecting what they have made over chasing additional yield.  The wealthy also know that their time is their most valuable asset and investing a lot of it on chasing more money may not be what they choose to do as a rational self-maximizer.  

Concentration of resources in one field you know a lot about can get you A LOT more wealth than diversifying, but it also carries more risk, both systemic and non-systemic.  Investing in index funds will beat selecting individual stocks in most cases for most people.  For alternative assets that are less liquid there is more opportunity to exploit inefficiencies in the market and thus having an advantage provides the opportunity for far more upside.  This is why there are hundreds of thousands of people on BiggerPockets trying to exploit these inefficiencies.  Real estate also has favorable leverage characteristics and tax treatment.  Other asset classes have features better than real estate in some categories as well.  

The wealthy people I know all do simple things to grow their wealth:

1.  Spend FAR less than they earn.   This is the rocket fuel for wealth and is the dead-level-simple formula for wealth that many people struggle with like they struggle with weight loss

2.  Focus their active efforts on things they understand very well and attempt to minimize the risk that comes with concentration of wealth in these areas

You get wealthy by:

-Earning more

-Spending less

-Making your money work harder

Spending less is far more powerful than earning more for many people if your goal is time independence.  Investing effort and time in learning high payoff skillsets where risk can be hedged to a large degree is also a key area to focus on if your goal is to be wealthy and specialize rather than diversifying.  

@Nicholas Varner thank you for taking the time to start this thread. It's was a collection of great thoughts. Several have been spoken to me at different points in my life, but I wasn't ready to apply them in my day to day walk of life.

It's my time/my season to use the informative information provided by you as well as @Bryan Hancock inserts from his post.

Very well spoken gentlemen. I tilt my hat to each of you.

                           Enjoy as you prosper.....

@Nicholas Varner I love my career. My time is very flexible. It's mentally and physically beneficial to my clients. It aids in repairing the body naturally. 

I plan to add investing as an additional full time career/ business. 

                              Enjoy as you prosper.....

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