In 1934, Benjamin Graham published the book Security Analysis, and in 1949, the book The Intelligent Investor. While you may not have heard of Mr. Graham, you may have heard of Warren Buffet. Mr. Buffet worked for Graham and was a student of his. Both of these books are considered foundational works for investors and are well worth reading. These books are all about the how of investing on a value-oriented basis.
Both books are quite lengthy, so let me share with you what I consider to be the most important quote contained in each. In both books, Mr. Graham sums it all up this way when writing about “investment vs. speculation”: “An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return. Operations not meeting these requirements are speculative.”
The idea behind “safety of principal” is to have a reasonable expectation of the return of principal, not necessarily “bank safe.” The concept of an “adequate return” is more of a moving target. For example, not too long ago money markets were yielding over 6% – what would have been considered an adequate potential return to take any risk at all? On the other hand, in 2007-08, a ZERO return might have been adequate vs. the losses many suffered.
But, this is all about the how to invest – what about the why?
One reason to invest is simply that we can – for the fun of it. In my practice, when the question is asked of prospective clients, the answers are usually for supplemental income for retirement, college funding for kids and grandkids, and sometimes for a favorite cause or charity. At this point, we try to dig a little deeper into the why. In his book No Shortcuts to the Top, Ed Viesturs writes about his quest to climb the 14 highest peaks in the world – without using supplemental oxygen. Early on in his climbing, a Sherpa guide told him a simple truth: “Getting to the top is optional, getting back down is mandatory.” Wow! What a concept!
From an investment standpoint, “getting back down” really concerns the distribution plan. It is a fact that we will all be 100% generous eventually. We will have given away all we own by the time we die, either to ourselves to spend or give away to others. So, ultimately, the why – where, when, and for what specific purposes we want it to go – is what drives the how.
Determining the why takes some time for most of us. To provide for college is a worthy goal, but why is college important to begin with? Perhaps “to provide funds for college so my daughter can fulfill her dream of being a physical therapist to help people live a more active and useful life” has more depth. Or, “to be able to have enough income to travel to Germany and Switzerland and visit all the landmarks from the movie The Sound of Music” – much more detailed. I think you get the idea.
Concerning strategies, we can evolve into areas like guaranteed income from insurance companies, providing a tax-free death benefit to enhance the value of an estate, tactical investing to reduce volatility, time horizon, emotional tolerance, and so on. One often overlooked concern has to do with beneficiary designations along with claiming strategies in the event of disability or death. In other words, ultimately, it is the why, on as deep a level as can be determined, that drives the how, when it comes to money placement.
So, some very important questions to ask yourself are: Have I spent much time talking with my advisor in depth about my why? Am I just trusting that whatever I am invested in will somehow get me there? Will what I have get to where it needs to be when it should? And, how have I verified this?
Something to think about …
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