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    December 2012
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    Complicate Your Investments. Here’s How.

    Don Shaughnessy

    You can make investing complicated and not very successful . You can do it with an ignore list and a focus list.

    Ignore

    • Volatility
    • Liquidity
    • Income taxes
    • Transaction costs
    • Time
    • Leverage effects

    Focus On

    • Rate of return
    • Relative rate of return
    • Publicity regarding your investment

    I will guarantee bad results if you do all of these.

    Instead, think about buying businesses not stock. Good businesses may not always reflect their value in the stock price, but over time, they tend to move toward higher value and better dividends.

    I noticed recently that Bill Gates’ investment management firm holds a large stake in John Deere. Interesting. The company is a dominant one in its field (pun intended,) and has been so for more than 140 years. It pays a comfortable dividend and it does not seem to be under attack from other well financed and innovative competitors. Nice deal. No drama.

    Drama is the hard thing to avoid. For some people the drama is the part of the investment they seek. I suppose most tax shelters and initial public offerings would be difficult without this aspect. If you invest for excitement and social status you are in trouble. You will have given up other values to get these. There is nothing free in the investment world. If you get more of one thing, you gave up something else to get it.

    Private equity is the most difficult. Everyone wants in on the ground floor of a successful business. It is not that easy.

    Even professionally managed venture capital firms, exposed to well understood and rational projects, analyzed by people with years of experience and superior skills, lose their money more often than they make money. 4 times as often! The expectation of success with your idea for a better dog harness or an ipad app or a Tanzanian theme restaurant are in the 1 in 100 range if I am being generous. More likely in the 1 in infinity range.

    There was an interesting piece in USAToday which dealt with why athletes go broke. They point out three reasons.

    1. They invest in private equity deals,
    2. They buy real estate,
    3. They spend too much.

    You knew about the third one.

    Better to invest in boring businesses with a track record, competent managers, and a transparent, liquid market. It will not be as exciting to talk about at the bar at the golf club but it will generate more net worth.

    If you change the ignore list to focus and the focus list to ignore, you will be okay. You can buy a nice trip or a new car (with cash) to impress the folks at the club.

    Don Shaughnessy is a retired partner in an international accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario. don.s@protectorsgroup.com

    The MONEY® Network