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Dear readers/followers,
In this article, I’m not going to talk about any one specific investment – instead, I’m going to be talking about mindset and macro/high-level strategy for success. I do a number of these articles each year, and their purpose is always a similar one. Update you, dear subscribers/readers, on my considerations, goals, and strategy, and see where I’ve failed and where I’ve succeeded.
I’ll show you what I’ve learned, where you can learn more, and what concepts I base my strategy on. You can find some of these points in previous pieces – because I’m consistent with my strategy – such as this article from around 7 months ago, speaking to the value of patience when investing.
My Own Strategy – from zero to millions in ~7 years
If you follow my work, you’ll know that I’m primarily, and above all else a value-oriented investor with an eye toward dividend investing.
What this means is that my primary concerns when investing my capital, aside from making sure that I am not investing in things that could blow up in 6 months or a year (although there are never really any guarantees of this fact) are to make sure that the investments I make are undervalued relative to where the company should be, and that I am getting rewarded for my trouble, even if the company should not recover quickly.
This means that I place a high value on dividends – not necessarily high yield – just a dividend that’s safe and being paid regardless of how the company moves in valuation.
This tends to preclude and sort out many investments that other investors make – including much of the tech and software sector. Like with Warren Buffett, this is simply not a field I frequent that often. I sometimes make investments here, and so far every single one has turned out very well – but they’re very rare.
I’m much more comfortable in the “physical products/commodities space”. These are things I understand.
Before I get started in earnest here, I also want to clarify that I have, as of over 2 years ago, reached my investment goals. I can, technically speaking, “live” off only my dividend payments and recurring non-professional incomes, which currently offer me an average monthly cost coverage of over 10.5x. Granted, I live in Sweden – my monthly costs are somewhat lower than say in the USA – but it’s still how I calculate where I am in terms of freedom.
However, it was never (except in the very beginning), a goal of mine to become “FIRE”. I wanted to be financially independent, but I never wanted to “retire early”. I work – I love working, and I love hard work. So I continue working.
If I could give any sort of investment guidance without making it specific to any one individual is this:
Do not let your eventual goal of freedom/a certain income dictate your investments.
As in, don’t invest in a company simply because you “need” that “yield” to make it independently. If you want a high yield, great – but make sure what you’re buying actually fulfills all of your criteria, not just the yield.
Because, dear readers, the one thing you cannot afford, regardless of your position or wealth (as I see it), is capital destruction. Exiting an investment at a loss is extremely destructive, and if this becomes a rule for you rather than an exception, you’re quickly “going down”.
Of course, I’ve had capital destruction/loss events. Over the last 6 years, I’ve exited 4 investments at a loss. None higher than a total of $4,500, and none at a total loss, but each one hurt bad. Each one was a keen lesson.
In many countries/cultures, including the one I currently live in, it’s a bit taboo to talk about money – specifically how much you make, how you made it “there”, and how you arrange/invest your money to make sure you stay there. It’s a very ethereal set of questions, almost alchemy unless you’re already “in the group” – meaning unless you’re already one of the people there.
It’s true even for me, I don’t often talk with colleagues and acquaintances, certainly not strangers, about how I made my money, how I invest it, or what has made me rich. That sort of discussion is saved for a select number of people – friends, family, and close business partners I trust.
As well as here – where, as you can see, I write mostly from anonymity.
How to build and manage a millionaire portfolio
The topic of how to build and manage a portfolio that is for millionaires is one that’s oft-covered here on Seeking Alpha. You’ll find many articles that say “This is how I’d invest $100k/$1M/$150k” or some other fictional amount. It makes for a great many clicks, and it makes for fun reading.
However, as someone who actually works with these questions, let me tell you that very few of these articles even come close to touching the truth of how something like that is built. A portfolio like that is never, in my experience, something where you take $1M and in the course of 24, 48 or 72 hours (or even 6 months) invest in a slew of “these ETFs, these funds, these growth stocks and so forth”.
That is why we have investment advisors – and that is why anyone who is not a CFA or equivalent in their geography can’t advise on these sorts of things.
My own portfolio, which is in the several million dollars at this point, is something that I’ve built over years through trial and error. I build for the long-term, and the only performance that matters to me is really the medium to long-term. I am happy to show you its performance over the longest timeframe I can track, as long as you also understand that this is not the entire portfolio, and it does not include certain considerations, like FX.
Nordnet Author’s Core Portfolio (Nordnet)
What this means is that over the past few years (not 5 as you can see, I’ve actually switched brokers, more like 3-4), I’ve outperformed my comparative indices – with the most outperformance in 2022. And that is my goal overall.
I feel like many of the articles that are being published on the subject make far, far too light of the process of investing tens of thousands, hundreds of thousands, or even millions of dollars.
Let me tell you this clearly: If it was a simple or easy process for decades or centuries of market outperformance as picking a few stocks or ETFs, everyone would be rich already – and if everyone’s rich, then no one is rich.
The world simply does not work this way.
The notion that anyone can forecast how anyone should continually invest – and not change it to achieve a certain, specific goal – for a dozen years, or even longer, is laughable. Do you think anyone in the 80’s could have forecasted the specifics or the shape the market would take in 2000-2023?
Successful investing is about knowledge, balance, patience, and sometimes some luck.
I’ve written articles about this sort of thing in the past – so let me repeat what I believe to be the three adoptable steps to become a millionaire.
1. Economy
In making sure you’re putting yourself in the right financial circumstances where you can underspend and oversave your capital is one of the first steps to generating a large portfolio.
Every single self-made millionaire I have ever met has had this trait in common. We don’t overspend on luxury items unless we can afford them simply from the interest on our principal. We drive conservative vehicles and live in houses either average or below what we could afford – at least until we could afford cars and houses only with the interest rate income from our principal.
We also realize that any hobby, interest, or non-work-related activity you have that consumes over 10-30% of your savings has the realistic potential of setting you back several years – that’s years, not months or weeks. Some examples that I’ve met are horseback riding, boats/yachts, several private houses/properties, and similar ones. Mind you, I am not saying that these are bad things – I’m saying if you’re trying to save up, and you don’t yet have the money to finance an equestrian hobby with interest from the principal, then this or similar hobbies have the potential of setting you back.
Remember – the very hardest thing in the journey to your million is actually getting the ball rolling. Once you get that snowball rolling – get to around $200-$500k, things get a lot easier. But looking back, nothing for me was harder than my first $100,000. It took several years. That’s also why it’s so detrimental/devastating to lose money. Because unless your circumstances have changed, it will take you exactly the same time/similar time to get back up again as it did the first time.
I’ve met several ex-millionaires who made their fortunes, lost them, and are now 55-65 and will not get them back. They’ve simply gone “too far” in life, and their life does not have the circumstances, or society is no longer the same place where their fortunes were made.
That’s why when I met a client of mine who proudly told me that he was going to be investing 55% of his considerable net worth in a single tech investment, I took 5 hours of my time to try and show him, with data and logic, why this was an astoundingly terrible idea from a risk/reward perspective.
Different amounts of capital give you access to different lifestyles. This differs across the world. I will argue that in Sweden, where I live, the lifestyle you can have if you have $3.5M in investable capital does not differ materially, or even at all, from the life you have with $8-$10M, despite this being a marked difference in capital. And of course, it depends on what sort of life you “want” as well. I personally do not see the appeal of living the life that many do with dozens or a hundred million dollars, compared to the life I can live now. This should also be a factor in how you invest, and what risks you take.
Because if you’re “just” an investor on the stock market, and unless you manage the hit the right Google/Amazon/Tesla company as it is cheap, that journey is one of 30-40 years, if it’s possible at all. Expecting annual growth rates of over 13-20% is not even done by any but the best investors on the planet.
So, Economy and economic considerations, are among the core things you need to look at.
2. Diversification
Overexposure means different things to different people. I take a very conservative tact in this respect, as most of you no doubt know.
I don’t have any holdings higher than around 5% unless the holding happens to be in a growth streak. Most sectors are around 5-12% of my total portfolio value – with only 2 above 12%, and none above 16.5% as of the end of this year.
What exactly does portfolio and investment diversification do for you as an investor?
You reduce what is known as unsystematic risk from your investments, which you have if you were to invest say, 50% in energy or 40% in REITs. If those sectors end up turning, you’re going down with them. By diversifying you reduce that unsystematic risk, up to a certain point.
As of the last portion of December of 2023, I still hold a vast cash position – now at 12.45% of my total, which is well above where I typically am. The reasoning for this is both the appealing ~4% risk-free rate and the fact that I am careful in allocating in this sort of macro environment.
I maintain a list of over 350 companies that I look at – out of those, less than 25 are currently where I would consider them significantly investable.
I also want to make it very clear, that compared to some, I don’t consider myself super-well diversified. Some changes I could make to increase this diversification going into 2024-2030 I could go into Eastern Europe. More into Asia, and buy more Japan or Australia. Perhaps even Indonesia. There are plenty of avenues that could offer positive diversification here.
The net result of diversification, including my own diversification, is a lower overall beta for my portfolio when considered at constant FX.
There is of course significant downside to the concept of diversification as well – that is something that cannot be argued with. The more you diversify, the more you dilute potential outperformance potential. You also have higher investments, with higher brokerage fees, transaction fees, etc. In fact, my fees and brokerage costs are significantly higher these days than I had years ago. I would say on average now I pay around $500 per quarter in various fees and transactions.
Remember, though when it comes to diversification and what you should be doing.
I want you to remember this. Jot it down, etch it into your mind.
No analyst, no matter what they say or how good they are, can ever 100% guarantee that an investment will not result in a loss of capital for you.
Diversification, due to this and many other factors, is crucial. The degree of this diversification, is entirely different.
3. Lastly, keep things simple
I buy undervalued and underappreciated companies that I believe, based on fundamentals, trends, historicals, and projections, have the ability to outperform.
A ratio of 100% is impossible. No one has 100% But over time, I’ve found my “batting average” to be well above where the average investor seems to be.
So what’s the differentiating factor for me when I look at others?
I can’t say for certain, of course, but what I would boil it down to is simplicity and patience.
I can see on chat and on comments that many investors overreact in the short term, asking whether they should sell or do something drastic as a result of volatile movements. I make it a point never to allow short term, and for me, a short term can mean 2 years, dictate my approach or my investments.
Unless something fundamental in a company changes, I very rarely shift my stance.
I also never go into overly complex, small, or investments that I do not understand.
If I can buy 5%-yielding Realty Income (O) at a double-digit upside, I won’t spend my time forecasting or allocating to a much smaller REIT at a similar upside and the same yield. I don’t diversify for the sake of diversification beyond a certain point and always retain simplicity, quality, and patience as my guiding qualities.
That’s why my allocation to Realty and Agree (ADC) is as extensive as they are.
When I look at the people I speak to, and I do speak to people about investing often, most of them do not need an overly complex portfolio – they just need 20-45 companies making up a conservative mix of dividend growth, dividend yield, and fundamental safety coupled with the tailwind of long-term valuation upside.
This will not give you a 30-50% annualized RoR over the 10-20 year timeframe – I can almost guarantee that – but it will provide you with the safety and confidence that I believe one needs to sleep well at night without panicking at the thought of any one specific investment going down.
Wrapping up
These three things remain the core tenets of my investment philosophy. In fact, they have become stronger in 2023 as I have reached the decision to use options trading less than I have before. While coming out of this 2022-2023 with options premiums at a very decent profit, I do not like the net increase in risk that follows along with it, no matter how safe you believe that you are being.
I will continue to use options in the right circumstances, but it’s no longer as core part of my strategy as it was during 2023, when I held a 10%+ cash position in part as a safety due to cash exposure through put options.
I also want to make it very clear that short-term sentiment rarely matters to me.
I try to observe in cold and logical manner the movements of the market, with the lessons that I have learned including not/avoiding:
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Acted rashly in selling, or buying a stock/security
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Been convinced to buy what has turned out to be a fundamentally unsound or unprofitable business/company.
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Be panicked in a downturn – why should I be? I know that the companies I’m invested in are sound, regardless of what the market happens to think for the next 2 weeks or 8 months. I could not care less what the market thinks of them in the short term.
As a reverse point in interpreting these trends, they also allow me very quickly to identify investments that do not fit my criteria. This is also why I have an overall dearth of faith in much of the established analyst community. Allowing 3-24 month trends to completely dictate your investment mandate or strategy means that you’re always “outside” of the larger cycles. It’s also why I point out this lack of long-term conviction both for FactSet, S&P Global and other investor services that try to estimate targets for a company.
The price I pay, a typical capping of long-term annualized RoR, is one I pay gladly and with a smile. I’ll never target 1,000%, or 10,000% rates of return over the short term due to the risk that these investments imply that I am taking. To me, that’s not even investing, but gambling. To engage in this would be disrespectful to the work and the money it took to get me where I am today. I also find this way of thinking to be compatible with almost every HNWI, VHNWI, or UHNWI that I’ve met or worked with. I don’t doubt that they exist, but I have no interest in working with them – it’s fine, there are investment professionals that specialize in aggressive investing strategies.
Me, I use the right lane, to equate this to driving. I drive the “speed limit”. I’ve observed key differences between Anglo-American and European investors and investment strategies and found myself tending towards the latter over the past few years. The Anglo-Saxon investment advisor and professional tends to hold a far more short-term perspective than does the Central European one. This is a broad generalization, I realize, but it’s one that I’ve found is actually true.
Me, I try to combine the best of two worlds. I’m not scared to go into something new, provided I understand it, but I’m also not short-term-oriented.
For 2024 – Expectations and forecasts
The macro forecast for 2024 is currently very mixed. You can find professionals who expect the biggest crash of our lifetimes, and you can find investors who believe we’re going to see another green/black year in the double digits.
I see the biggest question as the continuation of inflation and macro trends, together with the start of the rate cut cycle. It seems clear to me that several central banks unless something changes in the key inflation data, are going to be starting to cut rates. This obviously has upside potential for the market and for rate-sensitive investments, such as REITs. The positive potential is most certainly there. However, the broadly go into this based on this estimate would be foolhardy, in my view.
If anything, I expect 2024 to be as volatile or worse than 2023. We’re going to see ups and downs. We’re going to see valuation spikes and troughs for sectors and for companies.
This will enable our savvy to allocate capital to quality companies very cheaply, provided we’re keeping an eye on the market, which I of course intend to do.
What I am aiming to do is take advantage of what could be a solid reset in the market. I also believe in some key sectors, that I am going to share with you here.
1. Western Energy producers and distributors
2. Commodities, especially once they revert, including copper
3. Undervalued Medtech
4. Japanese and Yen-denominated businesses
5. The normalization of the overall yield curve
6. Undervalued REITs
These are some of the core opportunities I’m going to be looking at for evolving and structuring my portfolio.
Any questions?
Let me know.
