Remember your teens and early years of adulthood? Like me, I’m sure you did things and took risks you weren’t proud of and wouldn’t dream of doing today.
For my part, I’m less likely to take risks with my health and safety these days, like in my younger years. That’s because now that I’m married with children, I have people who depend on me. Doing things like driving fast, buying a motorcycle, or doing tricks on a ski slope that could lead to injury or lay me up for days or weeks could impact my wife and children financially and in other adverse ways.
Your behavior changes with an eye on the future and when others depend on you. What if you approached your investments with the same perspective? What if you invested with an eye on future generations? Chances are you’d speculate less and take a more long-term defensive approach.
“The first rule of an investment is don’t lose money. And the second rule of an investment is don’t forget the first rule.” -Warren Buffett.
“The secret to making money is playing defense. You must protect your capital and resist the urge to make wild bets that have a low probability of success.” -Paul Tudor Jones.
In his article, Rule #1 of Building Wealth: Play Defense With Your Money, best-selling author Darius Foroux compares investing to playing basketball and how the secret to success in both endeavors comes from adopting a defensive mindset.
In his own words, Foroux relates the following:
I used to play basketball in high school. My coach was a highly defense-oriented person.
When I was 17, and in my last year of high school, the Detroit Pistons won the NBA Finals. The team was coached by Larry Brown, known for his defense-first mentality.
My coach was a huge fan of the Pistons and their style of play. During our training, he focused more on shutting down the other team and getting “stops.”
This is the fundamental idea of basketball. A team that’s good at offense but lacks defense will likely lose more than they win. But a team with excellent defense and good offense has a better chance of winning.
In investing, taking a more defensive approach is more likely to result in success. Sure, a defensive approach can be boring and tedious for many investors, just like defensive basketball can be boring to watch. Still, for those with patience, this approach is most likely to build long-term wealth and leave a legacy for future generations.
In basketball, teams that take undue risks can easily dig themselves into a hole that can be difficult or impossible to get out of. For example, if you’re throwing half-court shots that result in long rebounds and easy, fast break points for the other team, you put yourself in a deficit that makes winning much harder.
Smart investors understand this concept of investing. Recovering from investment losses because of speculating and risk-taking puts your portfolio in a hole that’s hard to dig out of. For example, if you start with $100 and lose 50% of your portfolio, it will take more than a 50% gain to get back to $100. That’s because you’re working with less now ($50), and it will take a 100% gain to get back to where you started.
Smart investors don’t like to gamble and have to play from behind. They’d rather take the boring approach and invest in an asset long-term to generate consistent and reliable returns instead of trying to hit home runs all the time and striking out.
What are the go-to assets for smart investors looking to build long-term wealth and leave a legacy for future generations?
Cash-flowing tangible assets like commercial real estate (CRE) and productive businesses. Private assets like CRE and investments in productive private businesses (Private Equity or PE) are the two assets ultra-wealthy investors allocate the most to build long-term inflation and recession-insulated cash flow and growth essential for building wealth a legacy.
CRE and PE adhere to the first rule of investing, which is not to lose money. Because these assets are illiquid in the private markets, they’re insulated from widespread market volatility.
These insulated, capital-preserving, reliable income and growth-generating attributes appeal to savvy investors who are not willing to gamble with their money, their future, or their legacies.
