I’ve been listening to David Stein’s Money for the Rest of Us podcast for the last 18-months. In fact, not only have I not missed more than a handful of podcasts over the last almost two years, but, I am also a premium subscriber and pay for his extra content.
Needless to say, I am a fan of David’s work.
David was Chief Investment Strategist and Chief Portfolio Strategist at Fund Evaluation Group, LLC, a $70 billion institutional investment advisory firm, where he co-headed the 21-person research group.
David now helps individuals become more confident investors via audio, video, and books. His show now has 250 episodes and over 12 million downloads.
So, when I heard that David’s launched a new book, Money for the Rest of Us, 10 Questions to Master Successful Investing, I thought it would be a perfect opportunity to not only get my hands on a copy, which I have just ordered (and I will provide a review in a few weeks) but, to also ask David to answer a few questions for The Kickass Entrepreneur readers.
On that note, I’ve sent David five questions, and you can read his responses below.
What is the biggest mistake you see most investors make?
The biggest investment mistake investors make is not truly understanding what they are investing in. Investing in a new opportunity can often be intoxicating as we anticipate the future profits that could be earned. As a result, in their excitement, some investors don’t do their homework to understand what has to happen for an investment to be successful. They don’t consider the specific drivers that influence the return of investments. Examples of return drivers include:
- Cash flow in the form of dividends, interest, or rents.
- How that cash flow is expected to grow.
- How investors are valuing those cash flows.
When investors pay a premium for cash flow, such as a very high price-to-earnings ratio, then subsequent returns will probably be lower. When investors are unwilling to pay very much for cash flow, then that often leads to higher returns as investments surprise to the upside.
As investors, before we invest we need to be able to explain in simple terms what an investment is, including how it will generate a return, what are the fees, how liquid it is, and what needs to happen for the investment to be successful.
What do you think about the future of infrastructure as an investment?
Jeff’s note – I asked David this question because I am a big fan of investing in infrastructure and real assets. You can read more about that here: What are Real Assets, and How to Diversify Your Wealth by Investing in Them?
David Stein’s Response: Clearly aging infrastructure such as roads and bridges in the U.S., Canada, and other countries require investment to maintain and upgrade these critical components that ensure the private sector is productive in producing and delivering goods and services. Most of this “investment” comes from the public sector and is funded through taxes. There are also infrastructure projects that are financed by the private sector which then generate a return for investors in the form of tolls and users fees. These public-private infrastructure projects tend to be lower returning because they are highly capital intensive, require constant ongoing maintenance and there is pushback from households, businesses, and politicians regarding toll amounts.
In addition, there are not that many pure-play infrastructure companies so ETFs that focus on infrastructure tend to include a wide scope of industries such as utilities, railroads, forest product companies, etc.
Jeff’s Note: If you read the article I wrote on investing in real assets, you will clearly see that I take a slightly different approach to David regarding investing in real assets. Real assets, by definition, includes the following types of investments:
- Real estate
- Energy pipelines
And I like real assets because they have the following benefits:
How do you, David Stein, recession-proof your portfolio?
Investors whose lifestyles will be harmed by stocks falling 40% to 60% during a recession should be more concerned about recession-proofing their portfolio. That means having a lower allocation to stocks. I recession-proof my portfolio by having multiple return drivers including exposure to over a dozen asset classes, both in the public markets as well as private markets. My portfolio is also conservatively invested because my investment objective is to preserve capital rather than growth.
Most investors are still saving for retirement and need to be less concerned about recession-proofing their portfolios.
How do you suggest that a small business owner, who has a significant amount of their wealth tied up in their business, invest their profits, and how would you say that this type of investor is different from the average non-business owner investor?
A number of years ago I released a podcast episode titled Are You A Stock or A Bond? In the episode, I shared how we should consider our human capital when making investment decisions. Human capital represents the value in today’s dollars of our future income stream from work. Some individuals’ human capital is more bond-like in that their income doesn’t vary much during economic downturns, and they are unlikely to get fired during a recession, such as a tenured professor. Other individuals’ human capital is more stock-like because their employment earnings are highly sensitive to how the economy is performing and their professional income might decline during a recession.
Individuals whose human capital is more bond-like can afford to take more investing risk by allocating a higher percentage of their portfolio to the stock market. Whereas, individuals who have more stock-like human capital should have a lower allocation to stocks.
These same concepts apply to small business owners, but it is difficult to make generalizations because of the wide variety and performance of these businesses. If business income is fairly predictable and not overly sensitive to economic fluctuations then the business owner can afford to take more investment risk. Yet, even that allocation decision can vary depending on the owner’s life stage such as how close are they to retirement.
Jeff’s note – I wrote a book specifically to address how entrepreneurs should invest, and how they should invest their business’s profits. You can download a free copy from my website. The Kickass Entrepreneur’s Guide to Investing.
Tell us about your new book. What is the basic premise, and who is the book’s ideal audience?
My new book is Money for the Rest of Us: 10 Questions to Master Successful Investing. This is a book on how to invest geared toward individuals that want to grow and protect their wealth like a professional portfolio manager. Portfolio managers have an investment discipline that helps them decide how to allocate their assets under management to different investment opportunities.
As individual investors, we have the same task as professional portfolio managers: figuring out where to invest. My book details ten questions that we should ask before undertaking a new investment. This checklist can help us decide where and how much to invest while giving us confidence and peace of mind while others might be panicking during the latest market sell-off.
Here’s a video of David Stein speaking about investing, and more specifically, the title is: Investing won’t make you rich. It’s a short video, and one worth watching.
Jeff’s note – I wrote a blog post that you might be interested in reading: How to Become a Decamillionaire, Grow your Net Worth to $10 Million, and Join the 1% Club
Good luck with your wealth-creating journey.
If you enjoyed this post, you might also enjoy this one: How Much Money Do You Need To Never Have To Work Again? Let’s Do The Math.
You should also consider subscribing to my blog. I publish one article a week on small business and wealth creation. You can subscribe here.
Also, I published a book during the summer of 2018, “The Kickass Entrepreneur’s Guide to Investing, Three Simple Steps to Create Massive Wealth with Your Business’s Profits.” It was number 1 on Amazon in both the business and non-fiction sections. You can get a free copy here.