Where Should I Invest for Long-Term Prosperity?
With markets being at all times highs, and cryptocurrencies being the latest craze, I wanted to share some of my thoughts about Investing.
Before we proceed with the more tactical details, let’s clarify what we mean by “investing”.
In my mind, investing is the allocation of resources of one kind with the purpose of generating resources of another (or even the same) kind in the future.
What kind of resources are out there?
Different types of resources include Capital, Labor, Connections, Knowledge, Time etc.
Most people think about Capital (i.e. Money) when it comes to investing, but that should not be the case.
Actually, it is very limiting to only think about “money-for-money” investing.
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For example, you can invest Time to acquire Knowledge (by reading books), or you can put in Labor and Time to acquire Capital (by working as an employee).
In short, I am thinking about investing with a more holistic approach. I would also like to add that the end-goal of investing should be the increase of one’s long-term life happiness.
Warren Buffett, arguably one of the best investors that have ever lived, depicts that principle perfectly.
Buffett is known for his effective allocation of capital, something that has catapulted him to the highest ranks of the wealthiest people alive.
However, in order to achieve that, he has also invested enormous chunks of his time into accumulating knowledge.
Buffett estimates that he spends 80% of his working day reading and thinking!
This is an excellent example of investing time in return for Knowledge.
In fact, when asked how to get smarter, Buffett once held up stacks of paper and said:
“Read 500 pages like this every week. That’s how knowledge builds up, like compound interest.”
Now, let’s see how you can actually allocate your precious resources in order to invest for the future.
I highlight 4 types of investments ranked by descending magnitude of impact.
#1 – Knowledge / Self-Education
This is by far the the best investment you can ever make. You invest your precious and limited time to acquire vast amounts of knowledge, especially in fields related to your business, profession or industry.
By educating yourself, you are able to understand how the world really works. You are also in a better position to create something out of nothing (e.g. build a highly profitable company).
This is how Buffett has operated for all of his life.
First you get the knowledge, then you get the money.
#2 – Networking / Relationships
This is a close second. Investing your time and energy into building deep and strong relationships with other successful and/or aspiring people.
In this way, you create powerful allies that will help you reach your goals.
This is a long-term game where you cultivate relationships with your peers and together you grow better and more successful as time passes.
Again, think of Warren Buffett.
His closest partner is Charlie Munger, a very sophisticated intellectual that has worked with him to build Berkshire Hathaway into a business juggernaut.
Buffett also has deep and prosperous relationships with influential people like Bill Gates.
Don’t discount the power of networking and building relationships, especially in this era of a super-connected world.
#3 – Business Unit you own
Going down the chain, the next most impactful thing to invest in is building a business or participating into building one.
In fact, the most straightforward way to become rich is to build a massive business of which you own a huge piece of equity.
This is how the wealthiest people alive have accumulated their riches.
From Jeff Bezos and Bill Gates, to Elon Musk and Reid Hoffman, the vast majority of the wealthy have become rich by creating a company that has affected the lives of millions, or even billions, of people.
As I have mentioned in the past, the way to build wealth is to have a positive impact into other people’s lives.
Since we are finite beings, the only way to do that in an efficient and effective way is via a scalable business.
A business has an inherent value in and of itself, so owning a percentage of that asset, boosts your wealth.
First you provide value, then you get the money.
#4 – Financial investments
The last ones in the ladder, and those with the least impact in the long run, are the “traditional” investments that run from Stocks and Bonds, to Private Equity and Real Estate.
Now, let me be clear, I am not against investing in these assets. They can be powerful tools to boosting your Net Worth or retaining liquidity of your estate.
What I am saying is that at the early stages of wealth building, it is inefficient to allocate resources to them.
Consider a simple example.
Let’s suppose you have just finished your first year in the workforce and after living a frugal life, you have managed to accumulate $10,000 in savings.
This is a respectable amount, especially for young people, but not something that can sustain you for a long time.
Now, would it make sense for you to invest that money into, let’s say, the stock market?
Not really. Even if the market offered 10% annual returns (a figure which is on the higher end of expectations), that would leave you with $1,000 after one year (before taxes and fees).
Obviously, $1K on its own is hardly life changing.
A much better allocation of capital would be to invest part, or all, of the $10K amount into building a business of your own.
Though this might be small, it isn’t. Remember, Michael Dell founded Dell with only $1,000 in 1984 and grew it to a billion dollar company.
Sure, this is an outlier case, but more and more businesses are built by leveraging the savings that the founder has accumulated.
Especially in this modern era, where you have the option to launch an online business, capital requirements are minimal.
Of course, you wouldn’t start a venture without being appropriately prepared, and that preparation includes getting educated and building strong relationships and partnerships.
Essentially, you would be combining the first three types of investing!
All in all, business is the most potent vehicle to wealth building.
Only after you have gathered tons of capital via a successful business (to the tune of 6 or 7 figures, or even more), should you start considering more traditional investments.
Remember, you want to attach your wealth into a vehicle that will grow 100%+ year-over-year, not 10%! This is how the magic of compounding truly works.
Summing up, for people that are not already successful and wealthy, the best investment is in themselves.
Then follows the cultivation of mutually beneficial relationships, which ideally be put into action by creating a successful business.
Only after a relative level of financial success has been achieved should one allocate resources into financial investments.
Hope this helps! I am leaving you with the wise words of Benjamin Franklin.
“An investment in knowledge pays the best interest”
Oh man, I was all ready for you to talk about just financial investments then I was going to comment how you missed the best places to invest! I was so wrong, you hit all the bases with a great post. Investing in yourself is always the best thing and leads to the income that lets you do the investing in the rest! And just when I thought I was going to get to drop a “well actually” on you!