As founder of ThreeTypes.com, I thought it would be appropriate to give some insight into how I came to define my investing philosophy, and what led me to start ThreeTypes.com. Here is a brief synopsis of my story…
When I was younger, I thought I knew everything there was to know about investing. After getting my first job, I started reading everything I could get my hands on about smart financial management, and I dreamt of the day I could retire and travel the world. I created spreadsheets (and more spreadsheets) that proved that by putting away a specific percentage of my paychecks into retirement accounts and smart investments, I’d be able to quit my job and be financially independent in about ten to fifteen years. Not as quickly as I would have liked, but certainly better than waiting until I was 65.
Investing for an early retirement was going to be simple, and just a year out of college, I put my plan into motion. While still paying off my student loans, I started contributing the maximum to my 401(k), and took 10% out of each paycheck and stuck it in a brokerage account. I used that money to create a diversified portfolio that I was quite proud of: domestic and foreign equity funds covering small-, mid-, and large-cap companies, corporate and government bonds, real estate funds, etc.
I had asset allocation down to a science, and was continually rearranging my portfolio to ensure that I didn’t have too much this or too little of that. I was doing everything right. I watched and I waited in anticipation of the day I could be free from drudgery of work.
Years went by; my investments continued to grow. My salary increased into the six-figures, and my lifestyle improved as well. I was spending $2500 a month on rent to live in the heart of Silicon Valley, made it a goal to eat at all the nice restaurants, and never worried about money. At the same time, I continued to put away a fixed percentage of my income in anticipation of my retirement a couple years down the road.
Then one day, I sat down to my spreadsheets to figure out exactly when I’d hit this magic dollar figure where I could quit my job and finally be free to do whatever I wanted. And there it hit me – all those calculations I had done years earlier to assess my financial future had assumed I’d still be living the lifestyle I was living then, a year out of college. Who would have thought that one day I’d be eating $300 meals, taking expensive vacations, or buying lots of electronic toys?
The more I looked at the numbers, the more distraught I became. For ten years, I had been earning nearly 10% on my investments (more than most people who invested the way I did), but my investment growth just couldn’t keep up with my lifestyle growth. At the rate I was saving, it was going to be another 20 years before I could be financially free and retire; and that assumed my lifestyle didn’t continue to improve as well.
It was then I decided that there had to be a better way. I knew there were people making tons of money day-trading, buying real estate, creating web-companies, etc. Lots of people around me were getting rich investing in the stock market, real estate and businesses; why couldn’t I do the same thing? Perhaps investing was less about sitting back and waiting, and more about finding the deals and making the big score.
I bought books about fundamental stock trading, technical stock trading, learned about flipping houses, starting web-based businesses, and every other “get rich quick” idea I could think of. I took some of that money I had in my brokerage account, and started buying tech stocks; there were always rumors about all tech companies flying around, and if I could make a big score on the next Google or eBay, I’d be set. I even started an online business in my spare time, expecting some tech giant to come beating down my door to buy me out.
And I was making money. Some days, I would make several thousand dollars in the stock market. My online business could bring in a couple hundred dollars a day. So I started to up my “investments.” I’d buy more shares of stock, and hold them for shorter periods of time. I’d get a hot tip on a stock, and throw $20,000 at it without doing any research. A friend was starting a business, and I insisted on investing – I wouldn’t want to take a chance on missing out on a big score!
But then around March of 2000, things started to turn. The tech boom was ending, and I went from making thousands of dollars a day in the stock market to losing thousands of dollars a day. I wasn’t devoting any time to my online business, and my income there had run dry. All the money I had made “investing” over the previous two years went away…quickly. And I was right back where I had started two years earlier – facing 20 more years of work before I could retire.
In retrospect, it could have been worse; I saw lots of people losing their jobs, their houses, and their entire savings during the market downturn. Luckily, I wasn’t in that boat, but I still wanted financial freedom, and soon.
The Key to Success
A couple months later, I was at work, and was talking to a colleague about his plans for the upcoming weekend. He mentioned to me that he was flying to Las Vegas for the weekend. I asked, “Oh, so you’re going to gamble for the weekend?” And he replied, “No, actually I’m going to Vegas to invest.” I thought he was joking, and was implying his gambling skills were akin to printing money, so I said, “Oh, is that what you call it?”” His reply was, “No, seriously, I’m going to do some investing.”
After some more discussion, I realized that my co-worker was a real estate investor in his spare time. For 10 years, he had been buying, selling, and improving residential real estate — houses and apartments — and making a lot of money doing so. I mentioned my quick foray into real estate during my active investing years, and he started asking me questions about the types of properties I was looking at and considering.
Well, it quickly became clear to me that my friend knew a whole lot more about real estate than I did, and when I couldn’t even answer his basic questions, he said to me, “How did you expect to make any money in real estate without understanding the ins and outs of real estate investing?”
He was right; I never spent any time learning the details about real estate investing (or any other types of investing, for that matter). I simply read a couple websites, crossed my fingers, and jumped in.
Over drinks one evening, my friend spent a couple hours walking me through the basics of real estate investing, and helped me realize that there was a big difference between what he was doing — Investing — and what I had been doing — Speculating. He helped me understand that if I really wanted to be a successful investor — in real estate or anything else — I had to focus and learn. Most importantly, I had to have patience; successful investors spend years learning their investment area and honing their skills, and have the ability to make money in their area of expertise regardless of the state of the market.
Most importantly, my friend taught me that investing isn’t about a process, it’s about a plan. And until I have a plan for how I’m going to get from point A to point B, I’m not really an investor. That’s when my journey really started, and I continue on that journey to this day…
I’ll have more to say about my investing journey in future posts, but for now I want to wrap up some of the lessons I’ve learned into a methodology for thinking about your financial future. Check out the Three Types Philosophy…