Last week I got some great questions on trailing stops and investment theses, and I promised to share with you what Kenny Rogers has to do with your investing:
“You got to know when to hold ‘em, know when to fold ‘em,
Know when to walk away, know when to run.
You never count your money, when you’re sittin’ at the table,
There’ll be time enough for countin’, when the dealin’s done.”
Obviously, these are some of the lyrics from Rogers’ famous song, The Gambler, which won him a Grammy for best male vocal performance and hit #1 on the Billboard Country charts back in 1980.
(Don Schlitz, who actually wrote the famous song, also won a Grammy for Best Country Song, and the song made it to #16 on the Billboard Pop charts…but I digress…sorry, music lover as well as kung fu lover!)
So what does Kenny Rogers have to do with your investing?
Much has been written about “investing” vs. “gambling” vs. “speculating” vs. “trading”, so I won’t rehash that here…I’m pretty sure you already know the difference between those (if you don’t, just let me know in the comments).
And obviously you want to be an investor with the vast majority of your money, not a gambler (or perhaps an intelligent speculator with some of it, or a well-informed trader…but definitely not a “gambler”).
Gambling can of course be a fun sideline activity, but no sane or “smart money” investor I know of would ever choose to invest in an asset where the odds of losing your money over time are more than 50%, and the odds of winning any significant sum of money are minute…that’s just not a good risk/reward scenario.
In fact, the Win Amount for casinos (that would be the “Loss Amount” for YOU…) in Nevada for 2011, including tables, slots, sports book, and card games was…
Yep, if you happened to visit Vegas last year, you (or your fellow gamblers) collectively lost that much money and handed it over to the casinos. Ouch.
Now I’m sure some gamblers won some money, too, but it is statistically impossible to win at the vast majority of gambling games over time—the house has the mathematical advantage (if you’re curious, you can see the exact house advantage for each game here, and the stats I quoted above here — the UNLV has an entire department focused on gambling with great research and information.)
So the vast majority of gambling is a losing proposition.
And yet, Rogers’ song The Gambler in just two little lines captures the essential question that all investors struggle with:
How exactly do you “know when to hold ‘em, know when to fold ‘em, know when to walk away, and know when to run”?
This is exactly the question I received last week from Martin, who asked:
Great article Susan. And very helpful.
But isn’t it possible your investment thesis contradicts with putting trailing stops on your investments?
Like with the example with the uranium. What if Rick had his trailing stops at 25% loss? He would never make those gains I guess.
But I get that the idea behind both the trailing stops and the investment thesis is to take the emotions out of the game. Like different tools for the same purpose. — Martin
GREAT question! I probably should have used a different example other than Rick’s ultra-sophisticated private equity/credit example…in short, trailing stops were not an option for him, but let me explain further, because you bring up an important point:
Where do trailing stops fit into your investment thesis, and how do you know where and when to set them?
In other words, how do you “Know when to hold ‘em, and know when to fold ‘em?”
And the answer is…
You address this in your investment thesis. You should decide in advance what your exit strategy will be for your investments, so that when X happens, you can simply look at your thesis and say to yourself, “Self, you noted here that when X happened you said you would sell this investment” and then follow through and sell.
(By the way, it is very easy to read this here and logically think to yourself, “Oh, that makes sense Kung Fu Girl, of course I will do that!” but it is very, very difficult to do in practice…hence the focus here at Kung Fu Finance on Mastering Your Mind as well as your money!)
In short, there are very few “one size fits all” investing weapons that work perfectly in every single situation.
Here on Kung Fu Finance, I write to a broad range of investor skill-levels (which I have been told is the exact wrong thing to do by the way—on the Internet you are supposed to focus and target your audience specifically…but then again I’ve never been much of a rule-follower!)
Typically I focus on broad themes, investing strategies and ideas, and current macroeconomic events that affect all investors, whether you are just getting started with your White Belt and wondering what on earth QE3 is or just how big $16 trillion really is, or whether you are already a sophisticated Brown or Black Belt and are wondering how QE3 is going to affect your latest private angel investment, where you loaned $150,000 to a small private company because said company couldn’t get a line of credit from a bank due to the current lending environment.
But when you dive deeply into any area of investing, you begin to notice that just like in kung fu, you need different weapons and different strategies for different situations.
Just as you wouldn’t try to punch an opponent if he were slightly beyond your reach (you might try to kick him instead), and just as you wouldn’t run in blazing with your Chinese swords if your attacker pointed a gun to your head (much like Ben Bernanke has done to us…), you don’t use each and every investing weapon for each asset class or skill level.
Trailing stops are a great strategy for the vast majority of investors investing in the stock market, because they help you take the emotion out of your investing, protect your downside from unrecoverable losses, and help you “cull your losers while letting your winners ride”.
However, they are just one kung fu investing weapon in your arsenal, and are not perfect for every situation or every asset class.
For example, I interviewed Louis James several months ago, a very savvy investor who specializes in mining companies, particularly junior mining companies, and he recommended to not use trailing stops when speculating on junior mining companies, stating quite emphatically, “no, we do not recommend trailing stops on junior mining companies.” (They are too thinly traded and you can find yourself suddenly out of the market just because ONE large trader sold his shares…but nothing in the underlying company nor market has changed.)
Likewise, many gold and silver investors buy the physical metals rather than the ETF’s and funds and have a strong investment thesis that tells them that even if the price of gold and/or silver will be cut in half, much more than the “typical” trailing stop is set for, they will reassess but will continue to hold onto their gold/silver to pass it down to their grandchildren…having some sort of “trailing stop” on this wouldn’t make sense in this scenario.
So the best thing to do when you are developing your investment thesis is to ask yourself that question right from the get-go — does a trailing stop apply in this situation and do I want to use one? If so, what do I want to set it at? How much am I willing to risk?
In Rick’s Paladin example, he was talking about a private placement in a junior nuclear energy company, which like in junior mining companies is not a world where trailing stops are typically used. And in his specific case, he was actually investing in a private equity deal involving contracts and most probably holding periods…it wasn’t a “typical” share purchase on a major exchange by any means.
I probably should have used a more typical example in my investment thesis article, but Rick’s story was so good (and so fresh in my mind!) that I just had to share, and now I am glad I used it so that I can clarify this for you! Please let me know if this makes sense, and thanks for your great question!
Next, Mark asks,
Dear Kung Fu Girl,
I continually hear the term “wealth transfer” when an author describes what will happen when precious metals rise to new highs. I just did a “what if” scenario with my hard assets using breakout prices and was underwhelmed with the numerical results. Can you explain how wealth will shift with the rise or fall of gold and silver?
Certainly, I will do my best. I believe Mike Maloney is responsible for coining the “great transfer of wealth” term and what he is referring to is what he hopes will be the “blow-off top” in precious metals…he is a big believer in gold and silver (he’s written a very popular book on the subject, Rich Dad’s Guide to Investing In Gold and Silver, an excellent read by the way, and has opened up his own precious metals brokerage firm—talk about putting your money where your mouth is!)
Mike believes in trends and wealth cycles, which means that one day, gold and silver will be overvalued and it will then (gasp!) be time to sell them and invest in another more cheaply valued asset at the time (he hypothesizes that asset might be real estate, and intends to sell the majority of his gold and silver when he can buy a single family home in the U.S. for an ounce or perhaps ten ounces of gold…I forget the exact number, but it’s when gold is priced so high in dollar terms that many other assets, including real estate, seem absurdly cheap. For example, if you owned 10 ounces of gold valued at $10,000 each, you could buy a $100,000 single family home with your gold.)
But, you are right to do the math, because it is easy to read that and say, “Oh, fantastic! I will just buy gold and wait for it to rise to $10,000 and then buy several homes and rent them out and retire!”
This was easier to do back when gold was $300 / oz….It was much easier to afford many ounces of gold and multiply your numerous ounces by $5,000 or $10,000 per ounce and think to yourself, “WOW, that will be a great transfer of wealth to me when gold hits $5,000 per ounce! I will be rich!”
But for people new to the subject and just discovering gold for the first time, you are right to count the number of ounces you have, and then use whatever number YOU feel gold might rise to before the top has peaked and use that in your calculations.
And unfortunately, as you say, you might be slightly underwhelmed…e.g. if you have one ounce of gold and it goes to $10,000 / oz…that is a FANTASTIC gain, but you will still “only” have $10,000. Now if real estate or some other asset class drops in price precipitously and you can take that $10,000 and invest it into something that you can buy very, very cheaply…you can do very well.
But it is difficult to tell in advance just what that asset class might be…will it be U.S. stocks after a huge market crash? Or real estate? Or commodities? You will have to be on the lookout, but that is the idea behind the “Great Transfer of Wealth”, and you will certainly be better off than someone who is only invested in U.S. dollars should the U.S. dollar collapse!
But the extent of “how much better off” depends on many, many factors, as you point out…and once again, there is no “free lunch”.
Now, as you increase your financial education and knowledge and learn to take advantage of more sophisticated techniques, you can definitely attempt to “juice” your returns…but I would caution you to learn first, before applying leverage, or diving head-first into junior mining stocks, etc. There are many ways to increase your returns, but all of them require you to invest a bit in your financial education first.
I hope this makes sense…I’ve got another similar example for you in the next question!
Next, Diane asks,
Do you think the method you used to become an accredited investor in ~10 years is repeatable now, for those of us who are not or who slipped from being one to not being one over the last few years?
The method and the process, yes, absolutely! The identical investments, probably not, because markets have changed and trends have changed over time, but the method and process absolutely remain the same, which is why I am so excited about Kung Fu Finance.
However, there are a few important points here (that you might even call “dirty little secrets”…) but that are important for investors to understand because there is so much misinformation out there!
1. As I wrote earlier in “The Truth About Building Wealth” , it is hard to “invest” your way to accredited status unless you either have a great income or discover an extremely undervalued investment class and take a “big swing”.
That’s just the indisputable mathematical truth, and I have pledged to always give it to you straight. Many people hope to land a “10-bagger”, something that goes up 10X, but even if you find one investment that is a “10-bagger” and you invest $10,000 in it….well, you’ve still only got $100,000.
Not that that’s bad, by any means….most people would love to turn $10,000 into $100,000(!)…but it’s still not a million dollars.
You would have to take a much “bigger swing” and invest $100,000 to get a million dollars, and most investments that have the potential to increase 10x are highly speculative “junior” or “early stage” stocks — either tiny junior resource companies or early stage biotech companies or something similar, and usually in those highly speculative plays you need to formulate a strong investment thesis first and then if you have say $100K to invest in the speculative section of your portfolio, choose TEN different speculative plays in your area of focus to spread your risk around (and it can be more difficult than that…you’ve really got to do your homework on these…it is difficult to pick the “winners”).
And I wouldn’t recommend doing that with your entire portfolio….as I said above you should take maybe 10 or 20% of your portfolio, depending on your personal risk tolerance which varies WIDELY and DRAMATICALLY from person to person, and use only that portion for these speculative plays.
2. So I strongly advise you not to “bet it all on red” (or black…) but to go for solid, inflation-beating good returns, and keep adding value to the world (increase your income!).
My path to accredited was that I started a business that created a lot of value for people—IdeaWave Systems, and generated a good income from that, which I then invested. I bought a lot of gold and silver when prices were 1/4 of what they are now, and also invested in some rental property that gave off positive cash flow, and some choice resource stocks that have done very well, among other things, eventually working my way into some lucrative private equity deals, and learning and reading like a banshee along the way. But while I still recommend gold and silver to people, particularly after Bernanke’s latest announcement, I can’t guarantee that they will go up another 4x….no one knows the future! However, the reasons why I invested in them in the first place are all still valid, so I continue to be a buyer, and will be until trends change.
So to answer your question, the process is still the same, and if you study your market and investment area of interest and develop some strong investment theses, you can do very, very well.
(And it is important to learn how to keep and grow/invest your money…just look at all of those famous bankrupt stars who were so good at earning money, but not so great at keeping it!)
But I won’t lie to you—it takes hard work and perseverance, just like Bruce always says:
“The three keys to success are persistence, persistence, and persistence. The Power can be created and maintained through daily practice — continuous effort.” — Bruce Lee, Striking Thoughts
Diane also asks,
I heard you bought into Doug Casey’s development in Argentina. What information did you need to know before buying land in another country? Do you have any real estate elsewhere outside the U.S.?
I did, and I love it there! It’s called La Estancia de Cafayate, and it’s absolutely stunning with a fantastic community of people. I will be speaking there at the two Fall (Spring in Cafayate!) events this November, and if you’d like to check out the community it’s a great time to visit.
The absolute #1 thing you need to consider when you’re thinking of investing in an early-stage development like this is the developer.
You need to ask yourself…
- Does he have integrity?
- Will he complete the project or will it still be crickets and tumbleweed years from now?
- Can he deliver on his promises?
- What is his track record for projects like these?
That is absolutely the #1 question to ask, and if that gives you any pause whatsoever then run, don’t walk, for the next place on your list.
That’s one reason why I loved LEC — Doug Casey is a highly ethical man with loads of integrity and a strong moral code — he always does what he says he will do, and so far LEC supports that and then some! We have a gorgeous world-class 5-star spa, polo fields, golf course, kids club, wine bodega on the way, and so much more…it’s truly amazing to see where it is now vs. where it was when I first bought (crickets and tumbleweed!).
The next thing I advise you to do when considering foreign real estate of any kind is to go there in person.
You really do need to check it out for yourself…how is the trip coming and going? Do you like the landscape? The people? The weather? The community? It’s such a personal decision…you’ve really got to go check it out for yourself.
And of course, look into all of the legal and protective issues — does the country have a history of supporting land-owners and their titles? Does it have strong property rights? How are the taxes? Do you need a visa or can you live there comfortably as a tourist?
Network with others who have done what you want to do, and then, like always, take action!
As for other foreign real estate, I do not currently have any other real estate outside of the U.S., although we have in the past, and we (Kung Fu Guy and I) are currently looking at property in Uruguay and Paraguay and at agricultural properties throughout South America.
Once you leave the U.S., you’ll be amazed….it’s a big wide world of opportunity out there!
I hope this helps, and I thank you all very much for your patience! I have read literally hundreds, if not thousands, of email over the past few weeks and I love hearing from you. I am incredibly behind on catching up on said email and comments, but please trust that I read every word of every email/comment you provide and do take it to heart and work to incorporate it. I will get back to you soon…finally I am back from traveling for a bit (and much to report from the conferences soon!) and I can’t wait to share it with you.
I’d like to close today with one last quote from Kenny:
“If you’re gonna play the game, boy, ya gotta learn to play it right…”
Because it’s now more important than ever to grow your financial education and learn the game of investing.
Please let me know what you think about all of this in the comments! I do love hearing from you!
To your financial success,
— Kung Fu Girl
P.S. If all goes well, I’ll share some crazy pictures with you next week…Kung Fu Guy is turning the big 4-0! He’s the love of my life, and we are celebrating in style this weekend with onolicious eats and drinks and plenty-plenty good friends (he’s from Hawaii, and like my friend and LEC neighbor David Galland, got into far more than his fair share of fights growing up on the islands! If I can recover from our weekend festivities (remember my mantra: “work hard, play hard”…) I’ll be back next week with lots to share! Have a great weekend!
Want to master your finances? Join us now.
Why don't you join our community on your journey to financial mastery.
Sign up below for the FREE Kung Fu Finance newsletter.